**Exhibit 99.1**

**ANNUAL INFORMATION FORM**

**FOR THEFINANCIAL YEAR ENDED DECEMBER 31, 2006**

**March 23,2007**

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**TABLE OFCONTENTS**
| **ITEM 1.**                               | **CORPORATE STRUCTURE**                                         | ** **                                | **3**                            |                                                     |
|------------------------------------------------|-----------------------------------------------------------------|-------------------------------------------|----------------------------------|----------------------------------------------------------|
|                                           | 1.1                                                             | Name and Incorporation                    |                             | 3                                                        |   |
|                                           |                                                            | 1.2                                       | Intercorporate  Relationships    |                                                     | 3 |
|                                           |                                                            |                                      |                             |                                                     |   |
| **ITEM 2.**                               | **GENERAL  DEVELOPMENT OF THE BUSINESS**                        | ** **                                | **4**                            |                                                     |
|                                           | 2.1                                                             | Three Year History                        |                             | 4                                                        |   |
|                                           |                                                            |                                      |                             |                                                     |   |
| **ITEM 3.**                               | **DESCRIPTION  OF THE BUSINESS**                                | ** **                                | **4**                            |                                                     |
|                                           | 3.1                                                             | Our Business Strategy                     |                             | 4                                                        |   |
|                                           |                                                            | 3.2                                       | Growth Strategy                  |                                                     | 5 |
|                                           |                                                            | 3.3                                       | Business Overview                |                                                     | 5 |
|                                           |                                                            | 3.4                                       | Our Product Pipeline             |                                                     | 6 |
| * *                                       | * *                                                        | *3.4.1*                                   | *Pipeline  Table*                | * *                                                 | *6* |   |
|                                           | * *                                                        | * *                                  | *3.4.2*                          | *LHRH  Antagonists*                                      | * * | *7* |
|                                           | * *                                                        | * *                                  | *3.4.3*                          | *Signal  Transduction Inhibitors*                        | * * | *13* |
|                                           | * *                                                        | * *                                  | *3.4.4*                          | *Tumor  targeting (Cytotoxic Conjugates) and Cytotoxics* | * * | *17* |
|                                           | * *                                                        | * *                                  | *3.4.5*                          | *Tubulin  Inhibitors / Vascular Targeting Agents*        | * * | *19* |
|                                           | * *                                                        | * *                                  | *3.4.6*                          | *GH-RH  Modulators*                                      | * * | *20* |
|                                           | * *                                                        | * *                                  | *3.4.7*                          | *Immunotherapy  / Vaccines*                              | * * | *22* |
|                                           | * *                                                        | * *                                  | *3.4.8*                          | *Drug  Discovery*                                        | * * | *23* |
|                                           | 3.5                                                             | Strategic Alliances                       |                             | 23                                                       |   |
|                                           |                                                            | 3.6                                       | Intellectual Property -  Patents |                                                     | 25 |
|                                           |                                                            | 3.7                                       | Risk Factors                     |                                                     | 27 |
|                                           |                                                            |                                      |                             |                                                     |   |
| **ITEM 4.**                               | **DIVIDENDS**                                                   | ** **                                | **27**                           |                                                     |
|                                           | 4.1                                                             | Dividends                                 |                             | 27                                                       |   |
|                                           |                                                            |                                      |                             |                                                     |   |
| **ITEM 5.**                               | **GENERAL  DESCRIPTION OF CAPITAL STRUCTURE**                   | ** **                                | **28**                           |                                                     |
|                                           | 5.1                                                             | General Description of  Capital Structure |                             | 28                                                       |   |
|                                           |                                                            |                                      |                             |                                                     |   |
| **ITEM 6.**                               | **MARKET FOR  SECURITIES**                                      | ** **                                | **28**                           |                                                     |
|                                           | 6.1                                                             | Trading Price and Volume                  |                             | 28                                                       |   |
|                                           |                                                            |                                      |                             |                                                     |   |
| **ITEM 7.**                               | **DIRECTORS  AND OFFICERS**                                     | ** **                                | **29**                           |                                                     |
|                                           | 7.1                                                             | Directors                                 |                             | 29                                                       |   |
|                                           |                                                            | 7.2                                       | Executive Officers               |                                                     | 30 |
|                                           |                                                            |                                      |                             |                                                     |   |
| **ITEM 8.**                               | **LEGAL  PROCEEDINGS**                                          | ** **                                | **31**                           |                                                     |
|                                           | 8.1                                                             | Legal Proceedings                         |                             | 31                                                       |   |
|                                           |                                                            |                                      |                             |                                                     |   |
| **ITEM 9.**                               | **INTEREST  OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS** | ** **                                | **31**                           |                                                     |
| ** **                                     | ** **                                                      | ** **                                | ** **                       |                                                     |
|                                           | **ITEM 10.**                                               | **TRANSFER  AGENT AND REGISTRAR**         | ** **                       | **32**                                                   |
|                                           | 10.1                                                            | Transfer Agent and  Registrar             |                             | 32                                                       |   |
|                                           |                                                            |                                      |                             |                                                     |   |
| **ITEM 11.**                              | **MATERIAL  CONTRACTS**                                         | ** **                                | **32**                           |                                                     |
|                                           | 11.1                                                            | Material Contracts                        |                             | 32                                                       |   |
|                                           |                                                            |                                      |                             |                                                     |   |
| **ITEM 12.**                              | **INTERESTS  OF EXPERTS AND AUDIT COMMITTEE DISCLOSURE**        | ** **                                | **32**                           |                                                     |
|                                           | 12.1                                                            | Names and Interest of  Experts            |                             | 32                                                       |   |
|                                           |                                                            | 12.2                                      | Audit Committee Disclosure       |                                                     | 32 |
|                                           |                                                            |                                      |                             |                                                     |   |
| **ITEM 13.**                              | **ADDITIONAL  INFORMATION**                                     | ** **                                | **34**                           |                                                     |
|                                           | 13.1                                                            | Additional Information                    |                             | 34                                                       |   |
|                                           |                                                            |                                      |                             |                                                     |   |
| **ITEM 14.**                              | **FORWARD-LOOKING  STATEMENTS**                                 | ** **                                | **34**                           |                                                     |
|                                           | 14.1                                                            | Forward-Looking Statements                |                             | 34                                                       |   |
|                                           |                                                            |                                      |                             |                                                     |   |
| **SCHEDULE A  – AUDIT COMMITTEE CHARTER** | ** **                                                      | **36**                                    |                             |
|                                                |                                                                 |                                           |                                  |                                                          |  |  |  |  |  |  |  |  |

 

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**INTERPRETATION NOTE**

In this AnnualInformation Form, unless the context otherwise requires, the terms« we », « us », « our », « Æterna Zentaris”and the “Company” refer to Æterna Zentaris Inc. on a consolidated basis,including its subsidiaries and divisions and their respective predecessors.Unless otherwise indicated, the information presented in this AnnualInformation Form is given as at March 1, 2007.

# **ITEM 1.****                                                     CORPORATESTRUCTURE**

## **1.1****                               Name and Incorporation**

The Company wasincorporated on September 12, 1990, pursuant to the *CanadaBusiness Corporations Act* under the corporate name of 171162 CanadaInc., which name was changed under Articles of Amendment dated September 26,1991 to Les Laboratoires Æterna Inc. On May 26, 2004, the Company modified itsArticles of Amendment and changed its name to Æterna Zentaris Inc. (“ÆternaZentaris” or the “Company”) as well as to:

i)                                        create a new class of shares, being an unlimitednumber of Common Shares;

ii)                                     change each issued and outstanding SubordinateVoting Share into one Common Share; and

iii)                                  cancel the Subordinate Voting Shares and theMultiple Voting Shares as a class.

The authorized share capital of the Companyconsists of an unlimited number of Common Shares, an unlimited number of FirstPreferred Shares, issuable in series, and an unlimited number of SecondPreferred Shares, issuable in series.

Our head office is located at 1405Parc-Technologique Blvd., Quebec City, Quebec, Canada G1P 4P5. Our telephonenumber is (418) 652-8525 and our facsimile number is (418) 652-0881. Our website is www.aeternazentaris.com. Any information or documents on our Web siteare not, however, included in, nor shall any of such information or documentsbe deemed to be incorporated by reference into, this Annual Information Form.

## **1.2****                               Intercorporate Relationships**

The Æterna Zentaris headquarters are based in QuebecCity, Canada, with two wholly-owned subsidiaries; Zentaris GmbH (“Zentaris”) basedin Frankfurt, Germany and Echelon Biosciences, Inc. (“Echelon”) based in SaltLake City, Utah in the United States. These three companies form the ContinuingBiopharmaceutical Operations.

**During 2006, we sold a partial interest in AtriumBiotechnologies Inc. (“Atrium”), our former subsidiary and subsequent toyear-end, we distributed our remaining interest in Atrium to our shareholders.**

Atrium was foundedat the end of 1999 to develop, manufacture and market active ingredients,specialty chemicals and finished products in the health and personal careindustry. Since its inception, Atrium completed many accretive acquisitions andgrew steadily over the years.

On April 6, 2005,Atrium completed its initial public offering in Canada and began trading on theToronto Stock Exchange the “TSX” under the ticker symbol “ATB”.

Throughout 2006, as part of a thorough, strategicplanning process, the management and board of directors of Æterna Zentaris madethe decision to spin-off Atrium in two phases. On September 19, 2006, weinitiated the first phase, a secondary offering to sell 3,485,000 SubordinateVoting Shares of Atrium at a price of CAN$ 15.80 per share. This secondaryoffering closed on October 18, 2006, generating net

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proceeds of nearly $45 million to ÆternaZentaris. With this transaction closed, our remaining interest in Atrium was11,052,996 Subordinate Voting Shares representing 36.1% of its issued andoutstanding shares. Therefore, we no longer had a controlling interest inAtrium as of October 18, 2006.

The second phase was to distribute our remaininginterest in Atrium to our Shareholders; referred to as a reduction of thestated capital of Atrium.

On December 15, 2006, the Company’s shareholdersapproved a reduction of the stated capital of its common shares in an amountequal to the fair market value of its remaining interest in Atrium by way of aspecial distribution in kind to all Æterna Zentaris shareholders. This specialdistribution was completed on January 2, 2007. For each common share heldas of the Record Date of December 29, 2006, Æterna Zentaris shareholdersreceived 0.2078824 Subordinate Voting Shares of Atrium.

# **ITEM 2.****                                                     GENERALDEVELOPMENT OF THE BUSINESS**

## **2.1****                               Three Year History**

We are alate-stage, global biopharmaceutical company focused on endocrine therapy andoncology. On December 30, 2002, we acquired Zentaris, a biopharmaceuticalcompany based in Frankfurt, Germany. Zentaris was a spin-off of Degussa AG andAsta Medica GmbH, a former pharmaceutical company. With this acquisition, theCompany changed its risk profile and inherited an extensive and robust productpipeline with capabilities from drug discovery to commercialization with aparticular focus on endocrine therapy and oncology. As part of the acquisition,we also inherited a very experienced pharmaceutical team along with a networkof strategic pharmaceutical partners.

In May 2004, wechanged our name to Æterna Zentaris Inc.

In early January2005, we acquired Echelon inclusive of a product pipeline focused on theemerging field of transduction signalling technology thus mainly providing uswith complementary strategic fit to our drug discovery activities specificallyrelating to signal transduction modulators.

During the lastthree years, we advanced our robust product development pipeline with a focuson our lead product candidates: cetrorelix, ozarelix and perifosine, as well asour promising, targeted earlier-stage programs with high potential.

After thecompletion of a thorough review process, whereby we examined a number of strategicalternatives for how best to pursue and implement the Company’s business plan,we undertook and completed the divestiture of our interest in Atrium and weemerged in January 2007 as a late-stage, pure-play biopharmaceutical companywith a strategic focus on endocrine therapy and oncology.

# **ITEM 3.****                                                     DESCRIPTIONOF THE BUSINESS**

## **3.1****                               Our Business Strategy**

Æterna ZentarisInc. is a late-stage, global biopharmaceutical company focused on endocrinetherapy and oncology with proven expertise in drug discovery, development andcommercialization.

Our strategy is toaggressively advance our robust product development pipeline with a focus onour lead product candidates:  cetrorelix,ozarelix and perifosine, as well as our promising targeted earlier-stage programswith high potential.

For 2007, ourstrategy is to continue to market Cetrotide® (cetrorelix) in collaboration with MerckSerono on a world-wide ex-Japan basis and with Shinogi in Japan. Cetrotide® is sold for *in vitro*fertilization and on the market in more than 80 countries. In addition, we willcontinue to advance cetrorelix in our Phase 3 program for benign prostatichyperplasia (BPH) and our partner Solvay Pharmaceuticals (“Solvay”) will pursueits late stage program in endometriosis.

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In addition, weintend to further advance ozarelix with the collaboration of our partnerSpectrum Pharmaceuticals (“Spectrum”) in BPH with the goal of reachinglate-stage development by the end of 2007, as well as continue our Phase 2program in hormone-dependent inoperable prostate cancer.

With respect toperifosine, we, along with our partner, Keryx Biopharmaceuticals (“Keryx”) willcontinue development in multiple Phase 1 and 2 trials in oncology.  Our goal is to initiate one pivotal trial bythe end of the year, dependant on the positive outcome of several Phase 2ongoing trials.

We also intend tofurther advance our earlier-stage product candidates with high potential duringthe year including AN-152 and ZEN-012 both in oncological indications.

Furthermore, we believewe will continue to benefit from Impavido sales and from our reagentbusiness,at Echelon.  We intend tocontinue to seek pharmaceutical partnerships in Asia as well as leverage on ournon-core assets.

Withthis strategy, our expertise and depth, our strategic alliances and financialresources, it is our long-term goal to emerge as a fully integratedspecialist-driven global biopharmaceutical company with a strategic focus onendocrine therapy and oncology.

## **3.2****                               Growth Strategy**

We are a growing late-stagebiopharmaceutical company with a focus in endocrine therapy and oncologywith proven expertise in drug discovery, pharmaceutical development andcommercialization.

We are committing ourresources, our management expertise and depth and our strategic alliances toaggressively advancing our product pipeline.

Ultimately, ourobjective is to emerge as a fully-integrated specialist-drivenbiopharmaceutical company with a strategic focus on endocrine therapy andoncology.

## **3.3****                               Business Overview**

We are focused on advancing our productpipeline with a focus on endocrine therapy and oncology. We believe that wehave a proven expertise in drug discovery, pharmaceutical development andcommercialization.

We believe that the LHRH antagonist and thesignal transduction inhibitor therapeutic approaches are the value drivers ofour biopharmaceutical activities and have the potential to target large marketopportunities. Our LHRH antagonists include cetrorelix involved in *in vitro* fertilization (IVF), endometriosis and BPH andozarelix which targets BPH and prostate cancer. In addition, our signaltransduction inhibitors include our lead compound perifosine targeting multipletypes of cancer.

Cetrorelix is our lead LHRH antagonist and iscurrently marketed by our partners Merck Serono and Shionogi & Co Ltd (“Shionogi”)for *in vitro* fertilization under the brandname Cetrotide®.

Cetrorelix is in late-stage development inendometriosis with our worldwide (ex-Japan) partner Solvay. The endometriosisprogram, a five-study program was initiated in 2005. Two of the five studiesare currently under analysis. Importantly, we regained the worldwide (ex-Japan)BPH rights from Solvay in early 2006. During 2006, we had a successful end-ofPhase 2 meeting with the FDA, submitted an Investigational New Drug (IND)application and received acceptance of our IND from the FDA for a 1500-patient,Phase 3 program in BPH.  We theninitiated in early 2007 our first of three studies in the United States for thisindication.

Ozarelix is our fourth-generation LHRHantagonist aiming at extended suppression of testosterone levels, withoutrequiring a sophisticated depot formulation for long-lasting activity. Highlystatistically significant results of Phase 2 trials both in BPH and inhormone-dependent inoperable prostate cancer were announced in 2006. A Phase 2bstudy in the BPH indication was initiated by our partner Spectrum in 

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January 2007 and will include nearly 70patients.  An additional Phase 2 studywith ozarelix in hormone-dependent inoperable prostate cancer was alsoinitiated to verify and optimize the findings of our previous study, completedin 2006. Both studies are funded by our partner Spectrum who has exclusiverights to ozarelix in North America and India.

Perifosine, our lead signal transductioninhibitor, is an orally-active first-in-class alkylphosphocholine thatdemonstrated interactions with vital signal transduction mechanisms in tumorcells and showed induction of apoptosis. Perifosine has also shown anti-tumoractivity in several monotherapy trials. Perifosine is being investigated inover ten Phase 1 and 2 clinical trials in monotherapy as well as in combinationwith chemotherapy, biologics or radiotherapy.

We also have several preclinical and clinicalprograms under way with various potential development candidates. We alsobenefit from an important drug discovery unit which includes high throughputscreening systems and a library of nearly 120,000 compounds.

## **3.4****                               Our Product Pipeline**

### ***3.4.1******                     PipelineTable***

|                         | ** ** | ** **                   | ** ** | ** **                            | ** ** | ** **      | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **   | ** ** | **Partners in major geographies** |
|-------------------------|------------|------------------------------|------------|---------------------------------------|------------|-----------------|------------|------------------|------------|------------------|------------|------------------|------------|--------------|------------|--------------------------------------------------|
| **Category**            | ** ** | **Product**                  | ** ** | **Indications**                       | ** ** | **Preclinical** | ** ** | **Phase 1** | ** ** | **Phase 2** | ** ** | **Phase 3** | ** ** | **Marketed** | ** ** | **America**                                      | ** ** | **Europe** | ** ** | **Japan** |
| **Value drivers**       | ** ** | Cetrorelix                   |       | BPH                                   |       |            |       |             |       |             |       | •           |       |         |       | **AEZS**                                         |   | **AEZS** |   | Shionogi |
| ** **              |       | Cetrorelix                   |       | Endometriosis                         |       |            |       |             |       |             |       | •           |       |         |       | Solvay                                           |   | Solvay |   | Shionogi |
| ** **              |       | Ozarelix                     |       | Prostate cancer, BPH                  |       |            |       |             |       | •           |       |             |       |         |       | Spectrum                                         |   | **AEZS** |   | Nippon Kayaku in  Oncology |
| ** **              |       | Perifosine                   |       | Multiple cancers                      |       |            | ** ** |             | ** ** | ** **       | ** ** | ** **       | ** ** | ** **   | ** ** | Keryx                                            | ** ** | **AEZS** | ** ** | **AEZS** |
| **Oncology**            |       | AN-152                       |       | Ovarian, endometrium, breast cancer   |       |            | ** ** | •           | ** ** | ** **       | ** ** | ** **       | ** ** | ** **   | ** ** | **AEZS**                                         | ** ** | **AEZS** | ** ** | **AEZS** |
| ** **              |       | ZEN-012                      |       | Multiple cancers                      |       |            | ** ** | •           | ** ** | ** **       | ** ** | ** **       | ** ** | ** **   | ** ** | **AEZS**                                         | ** ** | **AEZS** | ** ** | **AEZS** |
| ** **              |       | AN-215                       |       | Solid tumours                         |       | •          | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **   | ** ** | **AEZS**                                         | ** ** | **AEZS** | ** ** | **AEZS** |
| ** **              |       | AN-238                       |       | Solid tumours                         |       | •          | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **   | ** ** | **AEZS**                                         | ** ** | **AEZS** | ** ** | **AEZS** |
| ** **              |       | Erk/PI3K inhibitors          |       | Multiple cancers                      |       | •          | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **   | ** ** | **AEZS**                                         | ** ** | **AEZS** | ** ** | **AEZS** |
| ** **              |       | Erucylphosphocholine         |       | Multiple cancers                      |       | •          | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **   | ** ** | **Keryx**                                        | ** ** | **AEZS** | ** ** | **AEZS** |
| ** **              |       | GH-RH antagonists            |       | Multiple cancers                      |       | •          | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **   | ** ** | **AEZS**                                         | ** ** | **AEZS** | ** ** | **AEZS** |
| ** **              |       | Vaccines                     |       | Prostate cancer, melanoma             |       | •          |       |             |       |             |       |             |       |         |       | **AEZS**                                         |   | **AEZS** |   | **AEZS** |
| **Endocrinology**       |       | Cetrotide® (cetrorelix) | * *   | *In vitro***fertilization             |       |            |       |             |       |             |       |             |       | •       |       | Merck Serono                                     | ** ** | Merck Serono |   | Shionogi/Nippon  Kayaku |
| ** **              |       | EP-1572                      |       | Cachexia, GH disorders                |       |            |       | •           | ** ** | ** **       | ** ** | ** **       | ** ** | ** **   | ** ** | Ardana                                           | ** ** | Ardana | ** ** | Ardana |
| ** **              |       | Ghrelin antagonist           |       | Obesity                               |       | •          | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **   | ** ** | **AEZS**                                         | ** ** | **AEZS** | ** ** | **AEZS** |
| ** **              |       | Oral LHRH peptidomimetics    |       | Cancer, endometriosis, BPH            |       | •          |       |             |       |             | ** ** | ** **       | ** ** | ** **   | ** ** | **AEZS**                                         | ** ** | **AEZS** | ** ** | **AEZS** |
| **Infectious diseases** |       | Impavido® (miltefosine) |       | Leishmaniasis   (cutaneous, visceral) |       |            |       |             |       |             |       |             |       | •       |       | Roche/   Tecnofarma                              |   | Action Medeor/  Paesel + Lorei |   | **AEZS** |
|                         |            |                              |            |                                       |            |                 |            |                  |            |                  |            |                  |            |              |            |                                                  |  |  |  |  |  |  |

 

**AEZSrights belong to Æterna Zentaris**

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### ***3.4.2******                     LHRH Antagonists***

**Cetrorelix**

Cetrorelix is a peptide-based active substancewhich was developed in cooperation with Nobel Laureate Professor Andrew Schallyof Tulane University in New Orleans. This compound is an LHRH antagonist (LHRHalso known as GnRH) that blocks the pituitary LHRH receptors resulting in arapid decrease of sexual hormone levels. Moreover, cetrorelix allows the LHRHreceptors on the pituitary gland to be blocked gradually. Conversely, the sideeffects usually associated with the use of agonists and resulting from totalhormone withdrawal can be avoided in conditions that do not require acastrating degree of hormone withdrawal. Therefore, in contrast to treatmentwith agonists, LHRH antagonists permit dose-dependent hormone suppression whichis of critical importance for the tolerability of hormonal therapy.

*The mode of action of cetrorelixand the distinction between LHRH antagonists and LHRH agonists*

LHRH is released by the hypothalamus in thebrain and controls the production of sex hormones (i.e. testosterone in thetestes and estrogen and progesterone in ovaries) via the activation of LHRHreceptors located on the pituitary gland (hypophysis).

When using LHRH agonists, the LHRH receptors onthe pituitary gland are stimulated leading to an initial increased secretion ofthe hormones LH and FSH, which in turn regulate formation of testosterone andestrogen. The increase or surge of hormonal levels induces a “flare-up” effectthat can last up to three weeks until the pituitary markedly decreases therelease of LH and FSH by desensitization and depletion of LHRH receptors (i.e.down-regulation) resulting in a considerable drop in testosterone and estrogenlevels. Though the initial flare-up effect is limited in time, it can sometimescause, depending on the nature and stage of the particular disorder,considerable additional symptoms or even life-threatening complications, whichin turn require additional therapeutic intervention. By simultaneousadministration of  anti-androgens, theflare-up effect can be attenuated. However, this additional treatment alsobears the risk of certain side effects, e.g. disturbances of the function ofthe stomach, intestines and liver.

During full hormone suppression, LHRH agonistsreduce the male sex hormones to ranges below castration level. In women, thehormone levels are far below the ranges observed after the end of theclimacteric. Treatment with an LHRH agonist, therefore, is regularly associatedwith side effects such as hot flashes, depression, muscle weakness, loss oflibido and, particularly in women, osteoporosis and ovarian cysts. At the endof treatment, it takes several weeks for the hormone function to return tonormal ranges. At the same time, an excessive rebound effect can lead torenewed deterioration of the symptoms.

 

We believe that cetrorelix, an LHRH antagonist,because of its different mode of action, can avoid the side effects associatedwith the administration of agonists. Since LHRH antagonists have a rapid onsetof action, the treatment time with cetrorelix can be much shorter than withagonists. Moreover, in various clinical studies, the effect of cetrorelixtherapy lasted much longer than the hormone suppression, which consequentlyconfirms the new therapeutic principle of intermittent treatment. Periods withmoderate and

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well-tolerated hormonal suppression can befollowed by intervals without treatment during which side effects are avoidedand quality of life is restored. Since there is no necessity for long-termtherapy and the overall treatment time is much shorter, the risks of sideeffects are also reduced. In particular, we also believe that the risk ofdeveloping osteoporosis in women taking the cetrorelix therapy regimen isdiminished.

Cetrorelix might therefore be useful in avariety of malignant and non-malignant indications in which a suppression ofthe pituitary-gonadal axis is desired. The degree of suppression ofgonadotrophins and sex steroids required is dependent on the clinical circumstancesand disease treated. For example, in patients undergoing controlled ovarianstimulation (COS) for assisted reproductive techniques (ART), endogenousgonadotrophin secretion has to be controlled, whereas development of thefollicle must not be adversely affected.

*Cetrorelix in*In Vitro*Fertilization (COS/ART)*

Cetrorelix is the first LHRH antagonist whichwas approved for therapeutic use as part of fertilization programs in Europeand was launched on the market under the trade name Cetrotide® (cetrorelix acetate) in 1999. In women whoundergo controlled ovarian stimulation (COS) for recovery of ovocytes forsubsequent fertilization, Cetrotide® prevents premature ovulation.LHRH is a naturally occurring hormone produced by the brain to control thesecretion of LH and, therefore, final egg maturation and ovulation. Cetrotide® isdesigned to prevent LH production by the pituitary gland and to delay thehormonal event, known as the “LH Surge” which could cause eggs to be releasedtoo early in the cycle, reducing the opportunity to retrieve the eggs for theassisted reproductive techniques (ART) procedure.

In comparison with LHRH agonists that require amuch longer pre-treatment, the use of our LHRH antagonist, Cetrotide®, permits the physician to interfere in thehormone regulation of the women undergoing treatment much more selectively andwithin a shorter time.

The effectiveness of Cetrotide® has beenexamined in five clinical trials (two Phase 2 and three Phase 3 trials). Twodose regimens were investigated in these trials: either a single dose pertreatment cycle or multiple dosing. In the Phase 2 studies, a single dose of 3mg was established as the minimal effective dose for the inhibition ofpremature LH surges with a protection period of at least four days. WhenCetrotide® is administered in a multi-dose regimen, 0.25mg was established as the minimal effective dose. The extent and duration of LHsuppression was found to be dose dependent. In the Phase 3 program, efficacy ofthe single 3 mg dose regimen and the multiple 0.25 mg dose regimen wasestablished separately in two controlled studies utilizing active comparators.A third non-comparative study evaluated only the multiple 0.25 mg dose regimenof Cetrotide®. In the five Phase2 and Phase 3 trials, 184 pregnancies were reported out of a total of 732patients (including 21 pregnancies following the replacement of frozen-thawedembryos). In these studies, drug-related side effects were limited to a lowincidence of injected site reactions; however, none of them was serious – likean allergic type of reaction - or required withdrawal from treatment. Nodrug-related allergic reactions were reported from these clinical studies.

Cetrotide® is theonly LHRH antagonist that is available in two dosing regimens. With animmediate onset of action, Cetrotide® permits precise control — asingle dose (3 mg), which controls the LH surge for up to four days, or a dailydose (0.25 mg) given over a short period of time (usually five to seven days).The treatment with Cetrotide® can be accomplished during a one-month cyclewith a simplified, more convenient and shorter treatment requiring fewerinjections than LHRH agonists.

Cetrotide® ismarketed in a 3 mg and a 0.25 mg subcutaneous injection as cetrorelix acetateby Merck Serono in the US and Europe. Approval for Cetrotide® in Japanwas gained in April 2006. In September 2006, we announced the launch ofCetrotide® in Japan for *in vitro*fertilization. Cetrotide® ismarketed in Japan by our partner Shionogi. In return of this agreement, theCompany will receive revenue from the supply of Cetrotide® to itsJapanese partners. The market competitor is ganirelix (AntagonTM/Orgalutran®) from Akzo (Organon) indicated for theinhibition of premature LH surges in women undergoing controlled ovarianhyperstimulation, which, however, is not yet approved in Japan.

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**Clinical DevelopmentOverview of Cetrorelix**

In October 2004, cetrorelix completed anextensive seven Phase 2 trial program in urology and gynaecology, a significantpart of which was sponsored by our partner Solvay Pharmaceuticals.

*Cetrorelix in Benign ProstaticHyperplasia (BPH)*

BPH is a hormone-driven enlargement of the maleprostate gland. The prostate is located directly at the vesicle outlet in themale surrounding the first part of the urethra. The enlargement puts pressureon the urethra, causing difficulty in urinating. BPH is classified into threestages according to symptoms: 1) the irritant phase, where the patient suffersdysuria (pain when urinating) and nocturia (the urge to urinate during thenight); 2) residual urine occurring in the bladder thus increasing problemsduring urinating; and 3) overflow of the bladder. These can result in formationof bladder stones, congestion of urine, and engorged kidneys; which can in turnlead to life-threatening kidney damage. Enlargement of the male prostate iscontrolled by testosterone. Testosterone is generally responsible for theproper functioning of the prostate. With increasing age, testosterone can causebenign cell growth.  The development ofBPH is caused by an imbalance of testosterone and aging.

Because LHRH agonists decrease testosterone tocastration levels, treatment of BPH with agonists is not convenient andtherefore not the best approach. Drug therapy with plant-based drugs,alpha-blockers or alpha-reductase inhibitors (5-ARIs) is possible but theplant-based drugs and alpha-blockers cannot delay further prostate growth, theymerely improve the symptoms in 50% of patients. Treatment with alpha-reductaseinhibitors decreases the size of the prostate; however, this form of therapy issuccessful only in patients with a greatly increased prostate volume and onlyafter a treatment period of at least 6 months. In contrast, cetrorelix improvesthe symptoms of BPH and reduces the size of the prostate after a shorttreatment period without chemical castration. The effects are independent ofthe prostate volume and are maintained for a long period following treatmentwithdrawal.

*BPH Clinical Trials*

All Phase 2 studies performed so far inpatients with symptomatic BPH revealed that cetrorelix is therapeuticallyactive in this indication as demonstrated by an improvement in symptoms asassessed primarily by the IPSS (International Prostate Symptom Score) as wellas an increase in urinary peak flow rate and a reduction in prostate volume.Cetrorelix has been shown to suppress the formation of the male sex hormonetestosterone, which plays a principal role in cell growth of the prostate.

On April 29 and May 25, 2004, we announced theresults of two placebo-controlled Phase 2 trials that were conducted in BPH. Asearly as one month following initiation of therapy, both trials demonstratedimprovement of clinical symptoms, classified and graded according to the IPSSwhich was paralleled by an increase in maximum uroflow in patients receivingcetrorelix treatment group, compared with patients on placebo group. Thepositive effect lasted three months without additional administration ofcetrorelix. Furthermore, the use of cetrorelix was associated with a slightreduction of prostate size and moreover did not have an adverse influence onsexual activity or libido.

On October 7, 2004, we announced additionalresults for cetrorelix in BPH, which was a randomized, double-blind,placebo-controlled Phase 2 trial that enrolled patients with symptomatic andobjectively defined BPH (decreased urine flow). This trial was conducted inEurope, under the coordination of Professor Frans MJ Debruyne from theDepartment of Urology, University Medical Center in Nijmegen. During a run-inperiod, all patients received two intramuscular injections of placebo, twoweeks apart. Thereafter, 250 patients with persisting symptomatic BPH wererandomized into five equal groups receiving either placebo injections or fourdifferent dosage regimens from 60 to 120 mg in two or three injections of adepot formulation of cetrorelix over the course of four weeks.

Patients were followed up for about six monthsafter the last injection for efficacy and safety assessments, as well as forlevels of testosterone and quality of life and sexual function. As early as onemonth following the initiation of therapy, the use of cetrorelix was associatedwith a dose-dependent, statistically significant improvement of clinical signsand symptoms, including IPSS and maximum uroflow, compared to placebo.

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Importantly, for all dosage regimens thetherapeutic response lasted until the last observation point, i.e. 24 to 26weeks following cessation of cetrorelix administration.

On March 16, 2005, we announced that ourpartners, Shionogi and Nippon Kayaku, are pursuing the development ofcetrorelix by initiating the first Phase 2a trial in the Japanese market withcetrorelix in BPH. This trial will evaluate the safety (systemic and localtolerability) and explore efficacy (effects on BPH-related parameters such asthe IPSS) of cetrorelix.

On January 30, 2006, we announced that weregained our worldwide rights (ex-Japan) from our partner Solvay to develop andpotentially market Cetrorelix in BPH and the ongoing development of cetrorelixin endometriosis was pursued by Solvay.

During 2006, we had a successful end of Phase 2meeting with the FDA. Following this positive meeting, we filed with the FDA anInvestigational New Drug (IND) application, it was accepted and therefore, weinitiated our phase 3 program in BPH at the beginning of 2007.

This Phase 3 program will include 3 studies toassess an intermittent dosage regimen of cetrorelix as a potential safe andtolerable treatment providing prolonged improvement in BPH-related signs andsymptoms.

On January 8, 2007, we announced the initiationof the first study of the Phase 3 program. This first study is randomizedplacebo-controlled, includes 600 patients and is being conducted across theUnited States and Canada under the supervision of Herbert Lepor, MD, Professorat NY University School of Medicine, New York. The primary efficacy endpoint ofthis study is absolute change in IPSS at baseline before beginning treatmentand Week 52, while safety endpoints include changes in sexual function as wellas BPH symptom progression. Other important endpoints consist of plasma levelsof testosterone and changes in bone mineral density.

The second study of this Phase 3 program willbe a multi-center randomized placebo-controlled study with approximately 300patients in Europe. We currently expect to initiate this study sometime duringthe second half of 2007.

The third study of the Phase 3 program will bea multi-center open-label, single-armed safety study with approximately 600patients in both Europe and North America. We expect to initiate this study inthe second half of 2007.

*Cetrorelix in Endometriosis*

Endometriosis is the estrogen-drivendisplacement of endometrium-like tissue (tissue from the mucous membranes ofthe uterus) to other organs outside the womb. In the abdomen, the tissue canspread to the fallopian tubes, the ovaries, the bladder, the small and largeintestines, the stomach, the lungs or the legs. Estrogen-dependent diseasesoften regress when estrogen production is reduced (endometriosis, and thepelvic pain associated with it, improves when estrogen production is reduced).Excessive and prolonged reduction of estrogen production, however, is typicallyassociated with adverse side effects, such as vasomotor symptoms and bone loss.

A similar, very low estrogen level can beinduced by oophorectomy (surgical removal of the ovaries) and by chronic LHRHagonist treatment. In both cases, estrogen replacement treatment is necessaryto reduce the hypo-estrogenic effects (e.g. bone loss, climacteric symptoms)associated with these therapeutic approaches. Administration of LHRH agonistscan initially lead to a deterioration of symptoms due to the flare-up effect,then, due to the complete suppression of estrogen to below castration levelsvalues for many months. These symptoms can further deteriorate upon withdrawalof hormonal replacement. The longer is the treatment period with traditionalLHRH agonists, the higher the risk of developing osteoporosis. Its use istherefore restricted to six months and can be extended only if estrogens andprogesterones are administered concomitantly.

We believe that the side effects could beavoided with our LHRH antagonist cetrorelix, due to the absence of flare-upeffects and to the possibility of controlling estrogen levels at valuescomparable to the 

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ones observed at the beginning of the regularmonthly cycle. Since the controlled hormone withdrawal is achieved in a veryshort period of time, complaints from monthly bleeding are reduced whileinflammatory *foci* of endometriosis aredepleted of their basis. Therefore, we believe that treatment time can bereduced. Initial experiences show that the effect of therapy persists for manymonths. Since the effect of cetrorelix starts within a short period of time andthe risk of developing osteoporosis is low, we believe that cetrorelix therapycan be repeated in several cycles.

*Endometriosis Clinical Trials*

In earlier Phase 2 clinical trials, cetrorelixwas given at a rate of 3 mg per week over a period of eight weeks. All patientswere free of pain during the course of treatment. A second laparoscopy wasperformed after eight weeks and an improvement of the disease was shown in 60%of the cases. The efficacy was comparable to agonists but with the benefit ofan almost complete absence of side effects. Cetrorelix allowed targeted controlof the hormone level to show rapid effects, while avoiding the problems ofmenopause and risks (e.g. osteoporosis) associated with an otherwise completeand long-term withdrawal of hormones. We believe that the rapid onset of actionwould be ideal for intermittent therapies, allowing for treatment-freeintervals with re-dosing at the time when the therapeutic effect starts tofade.

On April 29, 2004, we announced the results ofPhase 2 placebo-controlled studies demonstrating that cetrorelix use wasassociated with a rapid and durable therapeutic response, namely improvement ofendometriosis-related symptoms, such as pelvic pain, extending up to severalmonths following only two intramuscular injections of cetrorelix with a onemonth interval.

On March 16, 2005, we announced that ourworldwide (ex-Japan) exclusive development and marketing partner, SolvayPharmaceuticals, initiated a full development program for the potentialtreatment of endometriosis with cetrorelix. On March 5, 2007, we announced thattwo ot the studies included in the full development program were completed andunder analysis by our partner Solvay.

*Cetrorelix in Uterine Myoma*

As part of the seven Phase 2 programs,cetrorelix was also evaluated for the indication of uterine myoma. A uterusmyoma is a benign tumor of the uterine muscles. If the entire uterine wall ispenetrated by myoma, one refers to uterus myomatosus. Depending upon the lengthand the direction, it is either referred to as a subserous myoma, which islocated below the peritoneal covering of the uterus and grows towards theintestinal cavity, or a submucous myoma, which is located below the mucousmembrane and grows into the uterine cavity. The most frequent form however, isthe intramural myoma bound in the muscular layer of the uterus. Intramuralmyoma leads to pain in the lower abdomen and in some cases to prolonged orsevere monthly bleeding outside the normal cycle. This can cause severe bloodloss leading to anemia. Infertility and pregnancy problems such as miscarriageor premature delivery are also frequent consequences. When the myoma putspressure on the intestine or the bladder, the result can be constipation,bladder pain, or a desire to urinate. If the myoma exerts pressure on nervesleaving the spinal cord, the result can be back and neuralgic pain in the legs.

*Uterus Myoma Clinical Trials*

On April 29, 2004, we disclosed positive Phase2 results from a double-blind, placebo-controlled, multi-center trialevaluating the subcutaneous formulation of cetrorelix, administered weekly forfour weeks, as a pre-surgical treatment to 109 women with uterine myomas. Inaddition to evaluating the safety and tolerability of different doses of thenew formulation, the trial also evaluated whether cetrorelix use could lead tothe reduction of myoma and uterine volumes within a shorter treatment periodthan that normally required for LHRH agonists. Data from this trialdemonstrated that cetrorelix use led to a reduction of myoma and uterinevolumes after a one-month treatment period, which is significantly shorter thanthe two- to six-month treatment period typically required for LHRH agonists.The best response rate was obtained at a dose of 10 mg of cetrorelix per week.Cetrorelix use did not lead to castration-like symptoms.

Our partner Solvay has not yet initiatedadditional clinical studies in Uterus Myoma having decided to focus on endometriosisfirst.

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*Partners for Cetrorelix*

Cetrorelix has been licensed exclusively toSolvay Pharmaceuticals worldwide (ex-Japan) for all indications with theexception of IVF/COS/ART, which rights belong to Merck Serono and Japaneserights are held by Nippon Kayaku and Shionogi in the BPH indication, for whichwe regained exclusive worldwide (ex-Japan) rights. Japanese rights are held byShionogi.

*Competition for Cetrorelix*

The market leaders in the indication of BPH arePfizer, Astellas/Boehringer Ingelheim, Sanofi-Aventis and Abbott withalpha-blockers and Merck Inc and GlaxoSmithKline with alpha-reductaseinhibitors. Worldwide, there are four LHRH agonists for the treatment ofendometriosis, including TAP Pharmaceutical Products (Abbott and Takeda), AstraZeneca and Sanofi-Aventis.

**Ozarelix**

Ozarelix is a modified LHRH antagonist which isa linear decapeptide sequence. Ozarelix is a 4th generation LHRH antagonist aiming at extendedsuppression of testosterone levels that does not require a sophisticated depotformulation for long-lasting activity. The aim of this project is to identifyan active substance with superior properties for the development oflonger-acting formulations that we believe are particularly suitable for tumortherapy.

Single doses of ozarelix depot were tested inhealthy male volunteers. Ozarelix was well tolerated and produced adose-dependent suppression of testosterone. An immediate decrease intestosterone plasma levels was observed in all dose groups reaching levelsbelow 1 ng/ml within the first 12 hours after application. Duration ofsuppression was dose-dependent and at the highest dose of 60 mg causedtestosterone suppression for one month.

On August 12, 2004, we entered into a licensingand collaboration agreement with Spectrum Pharmaceuticals for ozarelix and itspotential to treat hormone-dependent cancers as well as benign proliferativedisorders, like BPH and endometriosis. Under the terms of the agreement, wegranted an exclusive license to Spectrum to develop and commercialize ozarelixfor all potential indications in North America (including Canada and Mexico)and India while keeping the rights for the rest of the world. In addition,Spectrum is entitled to receive fifty percent of upfront, milestone paymentsand royalties received from our Japanese partner, Nippon Kayaku,****that are generated in the Japan market.

*BPH clinical trials*

In October 2006, we announced positive andhighly statistically significant Phase 2 results for ozarelix in BPH. Themulti-center double-blind, randomized, placebo-controlled dose-ranging Phase 2trial included 144 patients who received different intramuscular dosageregimens of ozarelix, or a placebo, to assess its safety and efficacy. Ozarelixwas administered on day 1 or day   1 and15. The primary efficacy endpoint of improving clinical symptoms of BPH at week12, as measured by significant changes in IPSS, was achieved at all dosageregimens. However, the best results in terms of the most important decrease ofthe IPSS score were obtained with a dose of 15 mg administered on day 1 and 15.The observed mean decrease of the IPSS score at week 12 was minus 8.6, itpeaked at minus 9.4 at week 20 and was still at minus 8.7 as of week 28.Testosterone suppression levels were maintained above castration levels at alltimes. Secondary efficacy parameters such as uroflow, residual urinary volume,quality of life, and circulating testosterone levels were also measured andshowed good results. The outcome of the trial  demonstrated an excellent safety profile with ozarelix were patients hadno serious side effects. The erectile function was also not effected at anydose regimens.

On January 3, 2007, Spectrum announced the FDA’sacceptance of a Phase 2b protocol for ozarelix in BPH. Spectrum initiated thestudy in January 2007 which will involve approximately 70 patients. Dr ClausRoehrborn from the UT Southwestern Medical Center at Dallas, Department ofUrology, will serve as the lead investigator. The Phase 2b study is arandomized placebo-controlled trial of ozarelix. Patients will be dosed with 15mg of ozarelix or placebo on day 1 and 15 and will be followed for six months.The primary endpoint of the study will be the improvement of BPH symptoms asmeasured by IPSS. The study will also measure urine flow, residual urine volumeand quality of life.

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*Prostate cancer clinical trials*

In August 2006, we announced positive Phase 2result for ozarelix in hormone-dependent inoperable prostate cancer. Thisopen-label, randomized-controlled dose-finding trial enrolled 64 patientsreceiving different intramuscular dosage regimens of ozarelix to assess itssafety and efficacy. The study achieved its primary endpoint of defining atolerable dosage regimen of ozarelix that would ensure continuous suppressionof testosterone at castration level for a three-month test period. A secondaryefficacy endpoint aimed at assessing tumor response as determined by a 50% orgreater reduction of serum PSA level, compared to baseline, was also achieved.The best results regarding the primary endpoint of continuous suppression wereobtained with a dose of 130 mg per cycle where all patients remained suppressedto castration until at least day 85. In patients with continuous testosteronesuppression below castration level, tumor response as measured by PSA levelswas 97%. Following these results, the Company, in collaboration with itspartner Spectrum, has initiated an additional Phase 2 study in European centersto verify and optimize the findings derived from the cohort of patients havingreceived 130 mg of ozarelix per cycle.

On August 3, 2006, we announced a licensing andcollaboration agreement with Nippon Kayaku for ozarelix. Under the terms of theagreement, we granted Nippon Kayaku an exclusive license to develop and marketozarelix for all potential oncological indications in Japan. In return, theCompany received an upfront payment upon signature and is eligible to receivepayments upon achievement of certain development and regulatory milestones, inaddition to low double-digit royalties on potential net sales. Spectrum is entitledto receive fifty percent of the upfront, milestone payments and royaltiesreceived from Nippon Kayaku.

**ZEN-019 Non-Peptide LHRHAntagonist**

As outlined above, the LHRH receptor plays animportant role in a number of benign and malignant tumors. The Company’s drugdiscovery unit searches for small, non-peptide molecules which have the sameeffect on the receptor. Their advantage lies in the potential for oraladministration.

ZEN-019 is a new orally bioavailable LHRHantagonist for hormonal therapy that advanced to a pre-clinical stage where the*in vivo* activity has beenconfirmed.

We have exclusive worldwide rights for alltherapeutic areas for ZEN-019.

### ***3.4.3******                     SignalTransduction Inhibitors***

**Perifosine**

Perifosineis an alkylphosphocholine compound with structural similarity to phospholipids,which are the main constituents of cellular membrane,s and it is an activeingredient with anti-tumor capacities. In tumor cells, perifosine hasdemonstrated interactions with vital signal transduction mechanisms andinduction of programmed cell death (apoptosis).

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Perifosine exerts a marked cytotoxic effect inanimal and human tumor cell lines. The most sensitive cancer cell lines werelarynx carcinoma, breast, small cell lung, prostate and colon. Based on the *in vitro* trials, the mode of action of perifosine appears tobe fundamentally different from that of currently available cytotoxics.Pharmacodynamic data have demonstrated that perifosine possesses antitumoractivity, including tumor models that are resistant to currently availableagents for cancer therapy. This activity is based on a direct and relativelyspecific action on tumors. A dose relationship was also shown.

In preclinical and clinical Phase 1 trials(solid tumors), this orally administered agent has been found to have goodtolerability. Five Phase 1 trials have been conducted on perifosine, includingthe trial presented at the June 2004 ASCO meeting in combination withradiotherapy.

In four trials, the use of perifosine as asingle agent in a total of 94 patients provided initial encouraging evidence ofanti-tumor activity. In particular, investigators observed two partialresponses (>50% reduction) in patients with sarcoma and sixteen stablediseases in patients with breast, prostate, pancreatic and other forms ofcancer.

Based on findings in various tumor models, theU.S. National Cancer Institute (NCI), along with our North American partner,Keryx, investigated additional dosage regimens of perifosine in oncologypatients. A number of screening Phase 2 studies examine perifosine as a singleagent in several tumor types, including prostate, breast, pancreatic, head andneck, sarcoma and melanoma. Encouraging results showing anti-tumor activitywere obtained in soft tissue sarcoma, breast and prostate cancers and lead tofurther development in these indications.

A proof-of-concept Phase 1 study of perifosinein combination with radiotherapy conducted by the NCI of the Netherlands wascompleted in 2004. Results from this trial were presented at ASCO 2004. A totalof 21 radiotherapy-naïve patients, 17 of whom had advanced non-small cell lungcancer (NSCLC) and 14 had become refractory to prior chemotherapy, receivedoral perifosine doses ranging from 50 mg to 200 mg/day concurrently withstandard doses of radiotherapy. The trial data demonstrated an acceptablesafety and tolerability profile, with 150 mg/day established as the doserecommended for use in subsequent clinical trials. Also demonstrated waspreliminary evidence of anti-tumor activity at all dosage levels, includingcomplete or partial responses (complete disappearance and decreased tumor size,respectively), or stable disease, with a median follow-up for responders ofeight months. Importantly, in the cohort of 10 patients who were treated with 150mg/day, the established dose recommended for use in subsequent clinical trials,there were three complete responses, three partial responses, and four patientswith stable disease.

On September 22, 2005, we announced thecommencement of a Phase 2 clinical study of perifosine in combination withradiotherapy in patients suffering from non-small cell lung cancer. This is arandomized, double-blind, placebo-controlled trial to assess the efficacy andsafety of a 150 mg daily dose of perifosine when combined with radiotherapy in160 patients with inoperable Stage III NSCLC. The trial is being conducted incollaboration with the Netherlands Cancer Institute. The lead investigator isMarcel Verheij, MD PhD, of the Department of Radiation Oncology / Division ofCellular Biochemistry, at The Netherlands Cancer Institute in Amsterdam.

On March 2, 2006, our North American partner,Keryx, announced the initiation of a corporate-sponsored Phase 2 trial,multi-cancer, clinical program to evaluate perifosine as a treatment forleukemia. Dr Frank Giles, Professor, Department of Leukemia, at the MD AndersonCancer Center in Houston, TX, is the principal investigator. This Phase 2 trialwill assess the objective response rate and evaluate the pharmacokinetics andsafety and tolerability of perifosine as a single agent in relapsed orrefractory acute myeloid leukemia (AML), acute lymphocytic leukemia (ALL),chronic lymphocytic leukemia (CLM), high-risk myelodysplastic syndrome (MDS)and chronic myeloid leukemia in the blastic phase.

In June 2006, we announced positive data ofperifosine in patients with advanced renal cell carcinoma (RCC). Keryxdisclosed results from an interim analysis performed at the end of the firstyear of accrual, and the results of the RCC group met protocol requirements forexpansion of this cohort of a Phase 2, multi-center trial of perifosine thatincluded multiple types of tumor. Of the thirteen patients with RCC, seven wereevaluable for response. Three of them (43%) had a partial response and an additional2 

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patients (29%) achieved long-term stabledisease. Two patients (29%) had progressive disease. Additional patients willbe enrolled in this study.

In November 2006, Keryx presented intermediaryresults of the Phase 2 study of imatinib plus perifosine in patients withimatinib-resistant gastrointestinal stromal tumor (GIST). The primary endpointof this study is to evaluate the efficacy and toxicity of the combinationimatinib and perifosine in patients with imatinib-resistant GIST. To date, 16patients have been enrolled in the current study. Of the 12 patients withevaluable disease, there were 2 partial responses by Choi criteria (17%objective response rate (ORR)) and 1 partial response by RECIST criteria (8%ORR). Grade 3 and 4 adverse events were rare and included fatigue, myalgias, oculartoxicity and nausea/emesis. The early data from the current study suggest thatthe addition of perifosine to imatinib is well-tolerated and may have efficacyin the treatment of patients with imatinib-resistant GIST.

In December 2006, we announced positive interimPhase 2 data on perifosine in patients with relapsed and refractory multiplemyeloma (MM). Investigators concluded that perifosine alone or in combinationwith dexamethasone has activity in patients with advanced, relapsed/refractoryMM, achieving response and/or stabilization of disease in 69% of evaluablepatients to date. In this ongoing Phase 2 study, patients withrelapsed/refractory MM are treated with perifosine (150 mg oral daily dose) toassess the single agent activity of perifosine in this patient population. Ifpatients progress on perifosine alone, Dexamethasone (20 mg, twice weekly) isadded to their perifosine regimen.

The following are the ongoing trials sponsoredby Keryx:
| **Therapeutic  category** | ** **     | **Trial description**                                                                                                                      |
|---------------------------|----------------|--------------------------------------------------------------------------------------------------------------------------------------------|
|                      |           |                                                                                                                                       |
| Renal                     | **** **** | ****Phase 1 Study of Perifosine + Sorafenib for Patients With  Advanced Cancers****                                                        |
|                      | **** **** | ****Phase 1 Study of Perifosine + Sunitinib for Patients With  Advanced Cancers****                                                        |
| Sarcoma                   | **** **** | ****Phase 2 Trial of Perifosine in Patients With  Chemo-Insensitive Sarcomas****                                                           |
|                      |           | Phase 2 study of  imatinib plus perifosine in patients with imanitib-resistant gastrointestinal  stromal tumor (GIST)                      |
| Blood                     | **** **** | ****Phase 2 study of Efficacy of Perifosine Alone and in  Combination With Dexamethasone for Patients With Multiple Myeloma****            |
|                      | **** **** | ****Phase 1/2 Study of Safety & Efficacy of Perifosine  & Bortezomib +/- Dexamethasone for Myeloma Patients****                    |
|                      | **** **** | ****Phase 2 Study of Perifosine in Patients With Refractory  and Relapsed Leukemia****                                                     |
|                      | **** **** | ****Phase 1 Study of Perifosine + Lenalidomide and  Dexamethasone for Patients With Multiple Myeloma****                                   |
|                      |           | Phase 2 Study of  Perifosine in Patients With Relapsed/Refractory Waldenström’s  Macroglobulinemia                               |
|                      |           | Phase 1 Study of UCN-01  in Combination With Perifosine in Patients With Relapsed and Refractory Acute  Leukemias (trial sponsored by NCI) |
| Lung                      |           | Phase 1/2 Trial of  Perifosine in the Treatment of Non-Small Cell Lung Cancer                                                              |
| Breast                    |           | Phase 2 trial of  perifosine plus trastuzumab in patients with breast cancer                                                               |
|                      |           | Phase 2 trial of perifosine  in combination with endocrine therapy for breast cancer                                                       |
| Prostate                  |           | Phase 2 trial of  perifosine in combination with chemotherapy                                                                              |
| Glioma                    |           | Phase 2 Clinical Trial  of Perifosine for Recurrent/Progressive Malignant Gliomas                                                          |
| Exploratory  trials       |           | Phase 2 trial of  Perifosine in patients for whom no standard therapy exists                                                               |
|                      |           | Phase 2  Placebo-Controlled Study of Perifosine in Combination With Single Agent  Chemotherapy for Metastatic Cancer Patients              |

 

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*Partners for Perifosine*

A Cooperative Research and DevelopmentAgreement (CRADA) was put in place with the NIH/NCI in May 2000. A cooperationand license agreement was signed in September 2002 with the US company, AccessOncology, Inc. (AOI), for the use of perifosine as an anticancer agent coveringthe United States, Canada and Mexico. In January 2004, AOI was acquired byKeryx, which is pursuing the clinical development of perifosine under the sameconditions as AOI. The agreement, in particular, provides us free access to alldata from Keryx and its partner’s studies, as well as milestone payments andscale-up royalties to be paid to us on future net sales of perifosine in NorthAmerica. We own rest of the world rights of perifosine.

**ZEN-027Erucylphosphocholine**

On January 6, 2005, we announced the initiationof preclinical development of erucylphosphocholine (ZEN-027), an analogof perifosine which is suitable for intravenous administration. Likeperifosine, ZEN-027 belongs to a new class of compounds based onalkylphosphocholines. ZEN-027 possesses distinctive reduced hemolyticactivity thus allowing for intravenous injection.

On January 6, 2005, we also licensed to Keryx,our current North American partner for perifosine, certain rights to developand market ZEN-027 in North America, South Africa, Israel, Australia andNew Zealand while keeping rights for the rest of the world. According to theagreement with Keryx, the preclinical development costs of ZEN-027 are sharedbetween Keryx and Æterna Zentaris.

In 2006, toxicity studies oferucylphosphocholine were actively pursued. Acute and 4-week toxicity studiesin rats were completed and a 4–week toxicity study in dogs was initiated. Thesepreclinical data are a  prerequisite forthe performance of a Phase 1 clinical study which is currently planned in 2007.Expenditures for the preclinical development of erucylphosphocholine are sharedbetween Keryx and Æterna Zentaris.

**Other Signal TransductionInhibitors**

In addition to our activities withalkylphosphocholines, we are seeking for small molecule agonists andantagonists to lipid protein signaling interactions that are new andpotentially important therapeutic targets.

We are focusing our efforts on single and dualinhibitors of Ras-Raf-Mek-Erk and PI3K-Akt pathways. The Ras-Raf-Mek-Erk andthe PI3K-Akt pathways are constitutively activated in many cancer types, andinfluence both tumor development and progression.

Both signaling pathways represent promisingtherapeutic targets for the treatment of tumors. We have now identified a newcompound class with inhibitory activity against both the Erk and PI3K kinases.These small molecules inhibit the kinases at nanomolar concentrations in adose-dependent manner by competing directly at the ATP binding site. In a broadkinase panel, the molecules are very selective against other kinases. Incellular experiments the compounds inhibit the activation of downstream targetsAkt and Rsk1, and can stop the proliferation of various human cancer celllines. We are currently performing first *invivo* studies withfrontrunner compounds. Further optimization of the lead class is ongoingwith respect to pharmacokinetic parameters, in order to select a developmentcandidate as soon as possible.

**Miltefosine**

Miltefosine, marketed under the brand nameImpavido®, is the only oraldrug for the treatment of visceral and cutaneaous leishmaniasis. Leishmaniasisis a parasitic infection which is prevalent in tropical regions but which alsooccurs repeatedly and with an increasing tendency in industrialized countriesin HIV-infected people. According to the World Health Organization (WHO), 12million people are affected globally. The number of new cases annually isestimated to be 1 to 1.5 million people. Leishmaniasis is present in more than88 countries worldwide. Regions most greatly affected are the Indiansubcontinent, South America, the Middle East, North Africa and some areas ofCentral Africa.

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Depending on the species of leishmania, whichis transmitted by sandflies, the disorder can be present in the followingforms:

Cutaneous Leishmaniasis (CL): In the cutaneous form, this disease occursmost frequently in North and Central Africa, the Middle East and South America.The skin initially forms protuberances (skin lesions) around the sites of themosquito bite which can open like ulcers after several weeks or months.Although this form of leishmaniasis is not life-threatening and does notnecessarily require medication, drug therapy can accelerate healing and help toprevent formation of scars. However, in about 10% of patients, the infectiontakes a chronic course and requires drug therapy.

Visceral Leishmaniasis (VL): This infection usually has a subacute orchronic course and particularly affects the liver, spleen, bone marrow andlymph nodes. As a consequence, the patient has a wide variety of generalsymptoms, e.g. recurrent fever for many weeks, severe enlargement of the spleenand liver, disturbances of the hematopoietic system and blood coagulation, aswell as severe emaciation (cachexia). This is the most dangerous form ofleishmaniasis which, when untreated, leads to death within six months to twoyears following the outbreak of the disease. Visceral leishmaniasis occurs inAsia, in particular in India, Bangladesh and Nepal, in Brazil and in CentralAfrica. Co-infection with HIV is increasingly a problem in India, Africa andBrazil. There is an emergence of cases in the Mediterranean countries where itusually occurs as a co-infection with HIV. In addition, climate researchersestimate in a recent report a distribution to central Europe because of theclimate shift.

In developing countries with poor medical care,miltefosine could significantly reduce hospital treatment. Because it is anoral anti-infective, secondary infections (e.g. co-infection with HIV)associated with the use and possible re-use of syringes can be eliminated.Miltefosine has the potential to be included in an elimination program of theWHO.

*Registration Status*

Impavido® is thefirst oral formulation and has to be administered for 28 days. The Companyreceived approval for Impavido® for the treatment of visceral leishmaniasis inIndia in 2002 and in Germany in 2004. Furthermore, in 2005 and 2006, wereceived approval to market Impavido® in cutaneous and visceralleishmaniasis in several Latin American countries and the Indian subcontinent.Orphan drug status was granted for visceral leishmaniasis by the EuropeanAgency for the Evaluation of Medicinal Products (EMEA) in 2002. In 2006,Miltefosine was also granted orphan drug status by the FDA.

*Partners for Impavido**®** (Miltefosine)*

Impavido® ispartnered with German Remedies in India and Bangladesh. It is also partneredwith Roche for its distribution in Brazil, and Nimrall in Pakistan andAfghanistan. An agreement was signed for South America (excluding Brazil) withthe company Tecnofarma. In Germany, distribution of the registered product iscarried out by our partner Paesel + Lorei. B.A. Shiraz has been announced to beour partner for the territory of Iran.

### ***3.4.4******                     Tumortargeting Cytotoxic Conjugates and Cytotoxics***

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**Cytotoxic Conjugates**

In view of the non-specific toxicity of mostchemotherapeutic agents against normal cells, targeting such drugs to canceroustissue offers a potential benefit for patients with advanced or metastatictumors. Targeted cytotoxic peptide conjugates are hybrid molecules composed ofa cytotoxic moiety linked to a peptide carrier which binds to receptors ontumors. Cytotoxic conjugates are designed to achieve differential delivery, ortargeting, of the cytotoxic agent to cancer vs. normal cells.

Our cytotoxic conjugates represent a noveloncological strategy to control and reduce toxicity and improve theeffectiveness of cytotoxic drugs. The development strategy was to createtargeted conjugates with high cytotoxic activity based on doxorubicin (DOX), anapproved and commercialized product or 2-pyrrolino-DOX which is 500 to 1,000times more active then the parent compound. We are developing severalcandidates in which doxorubicin or 2-pyrrolino-DOX were coupled to the peptidecarriers targeting LHRH (AN-152 & AN-207), somatostatin (AN-238) orbombesin (AN-215) receptors. These conjugates are less toxic and more effective*in vivo* than the respectiveradicals in inhibiting tumor growth in LHRH receptor-positive models of humanovarian, mammary or prostatic cancer.

In AN-152, the most advanced of the cytotoxicconjugates, doxorubicin is chemically linked to an LHRH agonist, a modifiednatural hormone with affinity for the LHRH receptor. This design allows for thespecific binding and selective uptake of the cytotoxic conjugate by LHRHreceptor positive tumors. Potential benefits of this targeted approach aremanifold, and include a more favorable safety profile with lower incidence andseverity of side effects, as normal tissues are spared from toxic effects ofdoxorubicin. In addition, the targeted approach may enable treatment of LHRHreceptor positive cancers that have become refractory to doxorubicin given inits non-targeted form.

In preclinical studies conducted to date inseveral animal models of LHRH receptor positive human cancer cell lines, AN-152’santi-tumor activity and tolerability were shown to be superior to that ofdoxorubicin. As would be expected, AN-152 was not active or was significantlyless active than doxorubicin in LHRH receptor negative cancer cell lines. OnJanuary 18, 2005, we announced the initiation of a company-sponsored Phase 1dose-ranging study with this targeted anti-cancer agent AN-152 and we expect todisclose the detailed Phase 1 results in 2007.

In June 2006, we announced positive Phase 1results for AN-152 in patients with gynaecological and breast cancers whichshowed that the compound has a good safety profile and no dose-limitingtoxicities. Eight patients received AN-152 by intravenous infusion. Infusionwas well tolerated at all dosages, without supportive treatment.Pharmacokinetic analyses showed dose-dependent plasma levels of AN-152 and onlyminor (10-20%) release of doxorubicin. Recruitment is ongoing. Stabilization ofdisease was observed in one of eight patients in the ongoing Phase 1 study.

On November 27, 2006, we disclosed additionalpositive Phase 1 results regarding AN-152 in patients with gynaecological andbreast cancers. Further data showed the compound’s good safety profile andestablished the maximum tolerated dose at 267 mg/m2, which is equimolar to a doxorubicin dose of77 mg/m2. This dose will bethe recommended dose for a Phase 2 trial. The ongoing Phase 1 open-label,multi-center, dose-escalation, safety and pharmacokinetic study conducted inEurope includes 17 patients suffering from breast, endometrial and ovariancancers with proven LHRH receptor status. At a dose of 267 mg/m2, one partial response and three cases ofstable disease were observed from a group of seven patients. The Phase 2 trialswill focus on endometrial and ovarian cancers, two forms of cancer where LHRHreceptors are highly expressed, with an AN-152 dose of 267 mg/m2.

**Lobaplatin**

Lobaplatin is a platinum derivative that hasdemonstrated lower toxicity in preclinical studies compared with cisplatinum,specifically renal toxicity, and incomplete cross-resistance with otherplatinum derivatives suggesting potential therapeutic use even in tumorindications not routinely treated with platinum derivatives.

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Clinically, lobaplatin was well tolerated atrecommended dosages. Treatment was not associated with typical side effectsoften seen with cisplatinum, such as nephrotoxocity (impairment of kidneyfunction), otoxicity (loss of hearing capacity), neurotoxicity (effects onsensory function). In addition, vomiting was less severe than published datafrom both cisplatinum and carboplatinum. Characteristic toxicity of lobaplatinis a short-lasting, spontaneously reversible drop in thrombocyte count (bloodplatelets).

In a Phase 2 study conducted in China thatincluded 284 patients with a broad range of solid and non-solid tumors, safetyand particularly good therapeutic efficacy were demonstrated in patients withbreast cancer, small cell lung cancer (SCLC), and chronic myeloid leukemia(CML) (a cancer of the hematopoietic system). The primary endpoint in solidtumor patients was the remission rate according to WHO criteria, while responsein CML was assessed according to the disease-specific criteria of Talpaz. Thefavorable results of this study were the basis for approval of the product inChina including all three indications: breast cancer, SCLC, and CML.

In China, lobaplatin has been approved by theChinese health authorities for the treatment of inoperable, advanced breastcancer, SCLC and CML. In December 2002, we signed a contract with Hainan ChangAn Pharmaceuticals Ltd. for the marketing in China of lobaplatin. The contractincludes the worldwide manufacturing rights of lobaplatin by Hainan Chang AnPharmaceuticals. The technology transfer agreement provided for a first paymentto us upon signature and a later manufacturing-related payment.

We intend to license-out our rights forLobaplatin.

### ***3.4.5******                     TubulinInhibitors / Vascular Targeting Agents***

**Development of a Low MolecularWeight Tubulin Inhibitor**

Tubulin is a protein found in all cells thatplays an important role during cell division, in that it helps to transmitgenetic information to the daughter cells. Inhibition of this process leads tothe death of the affected cell. The anti-tumor agents taxol and vincristine,which are widely used in cancer therapy, are based on this principle. Bothcompounds are expensive natural substances and cause severe side effects whenused in humans.

We are currently identifying and developingnovel tubulin inhibitors which, compared with currently used products, exhibitin animal models improved efficacy, have a more acceptable side effect profile,an incomplete or no cross-resistance and are administered orally.

ZEN-012 and ZEN-017 are drug developmentcandidates with an excellent tolerability profile showing excellent *in vivo* activity in various tumor modelsincluding mammary, colon, melanoma and leukemia cancers after per osadministration. This compound expresses different modes of action. Stronganticancer activity is combined with pro-apoptotic and anti-angiogenicproperties. ZEN-012/017 inhibits the polymerization of cancer tubulin ratherthan bovine brain tubulin, and it destroys the mitotic spindel of the cancercells. ZEN-012/017 arrests the cancer cells in the G2M phase at a nanomolar concentration andinduced apoptosis. ZEN-012/017 is not cross-resistant to cisplatin, vincristineand doxorubicine in cell lines resistant to these drugs. With this profile ofactivity, ZEN-012/017 is a promising candidate for further preclinicaldevelopment.

In April 2006, we disclosed preclinical resultson ZEN-017/ZEN-012 at the AACR meeting. Presented results summarized apreclinical trial on ZEN-012/ZEN-017. Anti-proliferative effects of the activemetabolite ZEN-012 were studied in a panel of 35 established human tumor celllines including multi-drug resistant phenotypes. Given orally once weekly,ZEN-017 proved to be a potent inhibitor of*in vivo* tumorgrowth in melanoma, mammary, colon, as well as in leukemia cancers atacceptable and very well tolerated doses. The prodrug ZEN-017 is cleaved underphysiological conditions to the active compound ZEN-012. Mode-of-action studiesrevealed that ZEN-012 effectively inhibits tubulin polymerization (IC50 = 1490nM) and induces apoptosis in U937 cells. Furthermore, it was demonstrated thatZEN-012 inhibits topoisomerase II activity.

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On January 8, 2007, we announced the initiationof a Phase 1 trial for ZEN-012 in patients with solid tumors and lymphoma. Thisopen-label, dose-escalation, multi-center, intermittent treatment Phase 1 trialis being conducted in the United States with Daniel D. Von Hoff, MD, SeniorInvestigator at the Translational Genomics Research Institute in Phoenix, AZ,as the lead investigator. The trial will include up to 50 patients who haveeither failed standard therapy or for whom no standard therapy exists. Primaryendpoint of the Phase 1 trial will focus on determining the safety andtolerability of ZEN-012 as well as establishing the recommended Phase 2 doseand regimen. Secondary endpoints are aimed at establishing the pharmacokineticsand determining the efficacy based on standard response criteria.

**Æ-941 (Neovastat**®)

Æ-941 (Neovastat®) is an oral antiangiogenic product withmultiple mechanisms of action.  A Phase 3Study of Æ-941 with induction chemotherapy (IC) and concomitantchemoradiotherapy (CRT) for Stage 3 Non-Small Cell Lung Cancer (NSCLC) wasconducted by the US National Cancer Institute (NCI) (NCI T99-0046, RTOG 02-70,MDA 99-303). On March 5, 2007, we announced our decision to terminate thisdevelopment program following interim results of the pivotal Phase 3 trial innon small-cell lung cancer which showed that Neovastat, combined with inductionchemotherapy and concomitant chemoradiotherapy, had proven to be safe but didnot reach the main endpoint of improving overall patient survival by 25%compared to the placebo-control arm.

**RC-3095**

RC-3095 is an antagonist to a growth factor,bombesin, present in various tumors, in particular in small-cell lung cancer(SCLC), but also in pancreatic carcinoma, breast cancer and tumors of thegastrointestinal tract. It appears to play a significant part in the regulationof epidermal growth factor (EGF) and gastrin receptor expression. The blockadeof the bombesin receptor may therefore be an effective way to control thegrowth of certain tumors. RC-3095 is a hormone-like peptide that is beingdeveloped for multiple types of cancers. As a gastrin-releasing peptide inhibitor,the compound has proven angiogenesis inhibition *in vivo*and down regulation of HER-2 receptor. RC-3095 was tested in several cancerssuch as small cell lung, pancreatic, colorectal, breast and prostate.

In a Phase 1 trial in patients with varioussolid tumors, the subcutaneous injection of RC-3095 up to the highest doselevel tested was tolerated without clinically relevant side effects; systemictolerability of RC-3095 was very good. Although tumor response was not aprimary endpoint in Phase 1, patients with different tumor types showedclinical response. Based on these Phase 1 data, additional studies areexploring the activity of RC-3095 as a monotherapy in SCLC and prostate cancer.We decided to terminate the clinical development of RC-3095 at the end of 2006.

### ***3.4.6******                     GH-RHModulators***

**Development of a GrowthHormone Secretagogue**

Growth hormone secretagogues (GHS) represent anew class of pharmacological agents that directly stimulate growth hormone (GH)secretion from the pituitary gland without the involvement of growthhormone-releasing hormone (GH-RH) or somatostatin. We believe that there iscurrently no GHS on the market. Since GH is a potent regulator of lipid, sugarand protein metabolism, the potential clinical uses of GHS are numerous. They includegrowth retardation in children and treatment of cachexia in AIDS patients,which are currently the only approved uses of therapy of GH. The administrationof GH, which has to be injected every day, is cumbersome. Therefore, we believethat there would be a demand for new orally active drugs like GHS.

As part of our university collaboration, weaccessed new peptidomimetic compounds with GH secretagogue properties. The leaddevelopment candidate, EP-1572, is a novel peptidomimetic GH secretagogue (GHS)with potent and selective GH-releasing activity in humans. EP-1572 underwentlimited clinical pharmacology tests that demonstrated a potent stimulation ofthe GH secretion after oral administration in human volunteers. This producthas been licensed to Ardana Bioscience Ltd. (“Ardana”), which initiated anopen, randomized, placebo-controlled Phase 1 dose-ranging study in April 2004.Thirty-six (36) healthy subjects were included in this study to receive eitherthe reference hormone GH-RH by 

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I.V. route or one of the following dose levelsof EP-1572: 0.005, 0.05 or 0.5 mg/kg by oral route. EP-1572 at the dose of 0.5mg/kg orally caused an increase in growth hormone release equivalent to thatinduced by GH-RH intravenously. The compound was well tolerated and no otherhormones showed a significant modification after any dose of EP-1572.

In June 2006, Ardana presented resultsregarding EP-1572 at the 2006 Endo Convention. These results referred to thePhase 1 trial regarding the stimulating effects of EP-1572 on growth hormonefollowing both oral and intra-duodenal administration in healthy males. Thisstudy showed that EP-1572 was well tolerated by the 36 volunteers enrolled andno adverse events were reported. Administration of EP-1572 either orally or viaintra-duodenal infusion results in increased levels of growth hormone in theblood. This stimulation of growth hormone appears to be selective as no otherhormones/analytes that were measured (cortisol, ghrelin, prolactin, insulin,glucose and ACTH (Adrenocorticotropic hormone)) were affected in adose-dependent or statistically significant way by administration of EP-1572either orally or via intra-duodenal infusion.

**Ghrelin Receptor Ligands**

Ghrelin is a peptide predominantly produced bythe stomach.  Apart from a potentGH-releasing action, Ghrelin has other activities including stimulation oflactotroph and corticotroph function, influence on the pituitary gonadal axis,stimulation of appetite, control of energy balance, influence on sleep and behavior,control of gastric motility and acid secretion, and influence on pancreaticexocrine and endocrine function as well as on glucose metabolism. The recentdiscovery of ghrelin and its receptors opens up new opportunities for thedevelopment of drugs that will treat metabolic disorders. There is indeed apossibility that ghrelin analogs, acting as either agonists or antagonists,might have clinical impact without affecting GH level.  The use of ghrelin antagonists as appetitesuppressants or inhibitors of lipogenesis could open up new opportunities forthe treatment of obesity and associated diseases (e.g. diabetes, cardiovasculardiseases).  The use of ghrelin agonistscould have therapeutic benefits which are expected to offer hope for cachecticor anorexic patients.

In 2004, we established a research and licensecollaboration agreement with Le Centre National de la recherche scientifiqueand University Montpellier I and II, France, acting in their own names, as wellas in the name and on behalf of the Laboratoire des Aminoacides, Peptides etProtéines (LAPP) (UMR 5810), directed by Dr. Jean Martinez, for the synthesisand characterization of new chemical entities acting as ghrelin receptorligands.  According to the agreement, wehave the worldwide rights to develop and exploit the new compounds for anyindication. Compounds with the most potent affinity for the ghrelin receptorswill be investigated further through an international network of academicinvestigators with expertise in the field of endocrinology in order to identifyclinical development candidates.

Additionally, we also established a researchcontract with the Department of Experimental and Environmental Medicine of theUniversity of Milan, Italy, under the direction of Prof. Vittorio Locatelli,for the pharmacological characterization of potentially ghrelin receptorligands.

In August 2005, we filed a first patentapplication to protect a series of new chemical entities characterized asghrelin receptor ligands.

In May 2006, we established a research projectagreement with the University of Montreal. This research project will focus onthe characterization of ghrelin receptor ligands on fat tissue. This project isled by Huy Ong, Professor at the Faculty of Pharmacy, at the University of Montreal.

In August 2006, we also initiated a researchcollaboration with the Hôpital Laval (Quebec City) under the direction ofDr. Denis Richard. This research collaboration will focus on thepharmacological characterization of ghrelin receptor ligands *in vivo*(e.g. the effects in diet-induced obesity models).

In October 2006, we presented for the firsttime our *in vivo* data on the capacity of ghrelinantagonists of selectively inhibiting food intake. This study, using a ratmodel, outlined the capacity of ghrelin antagonists’ ability to inhibitappetite without affecting growth hormone secretion and represents evidencethat ghrelin antagonist compounds can selectively inhibit food intake. Itfurther supports the hope that ghrelin antagonist compounds have the potentialto be useful for the treatment of obesity.

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**GH-RH Antagonists**

GH-RH is a hormone secreted in the brain by thehypothalamus that acts on the pituitary gland to stimulate the synthesis andthe release of growth hormone (GH). Many tumor types are potentially dependenton levels of GH and insulin-like growth factors, IGF-I and IGF-II, whichstimulate cell proliferation while inhibiting programmed cell death(apoptosis).

GH-RH antagonists represent a potential novelclass of promising anti-cancer agents that may offer distinct advantagescompared to other classes of anti-tumor agents, with utility in a variety oftumor types. GH-RH antagonists possess the ability to exert both direct (byblocking GH-RH receptors on tumor cells) and indirect (by blocking thesecretion of GH from the pituitary and thereby suppressing the production ofIGF-I in the liver) anti-proliferative effect. Early evidence for theanti-tumor activity of GH-RH antagonists was provided by research conducted atTulane University, which demonstrated that GH-RH antagonists inhibit the growthof a broad range of cancer cell lines, including pancreatic, colorectal,prostate, breast, renal, small-cell/non small-cell lung cancer, osteosarcomaand glioblastoma. Importantly, GH-RH antagonists were shown to have a directanti-proliferative effect *in vitro* oncertain cancer cell types, an action that is thought to be mediated by thepresence of locally-produced GH-RH, which may act as an autocrine growthfactor, and its receptors in the respective cancer cell lines. GH-RHantagonists also inhibit indirectly the production of IGF-I and IGF-II intumors.

In 2006, selected GHRH antagonists have beenprovided to several of our academic partners for further preclinicalevaluation.

### ***3.4.7******                     Immunotherapy/ Vaccines***

Cellular proteinsexpressed by oncogenes have been recognized as a major cause of tumordevelopment. One of the central oncoproteins involved in cancer formation arethe Raf proteins. Based on these proteins, new unique therapeutic strategies,new predictive animal models and new development products have been generatedto efficiently combat cancer. These consist of virulence attenuated, genemodified bacteria expressing tumor antigens, including oncoproteins or enzymes.Such bacteria are used for vaccination as well as tumor targeting and deliveryof antitumoral compounds towards the tumor tissues. This new vaccine approach,therefore, exploits the ability of bacteria to induce potent immune responsesas well as direct these responses against malignancies. The immunogenicity ofthe vaccine will be further enhanced by the capacity of bacteria to colonizetumor tissues. This property will be used to transport substances, e.g.proteins, into the tumor tissue, which are capable of converting non-toxicpro-drugs into active drugs. The use of bacterial carriers for therapeuticvaccination against tumors and the concept of bacterial tumor targeting will befurther developed with the Julius-Maximilians-University of Würzburg, includingthe highly recognized researchers Prof. Dr. Ulf R. Rapp, who is member of ourScientific Advisory Board, and Prof. Dr. Werner Goebel. Prof. Rapp is a knownexpert in the field of cell and tumor biology and Prof. Goebel is a pioneer inthe field of vaccines based on recombinant bacteria.

The preclinicalproof of principle has already been shown in a transgenic animal model and issupported by several patent applications. The most advanced products arebacterial tumor vaccines which are based on the approved human vaccine strain *Salmonella typhi* Ty21a. The principle of these recombinantvaccine strains is the secretion of the tumor antigen using a so-called Type Isecretion machinery derived from *Escherichia coli*.To date, two different vaccine strains have been generated up to GMP scaleproduction – a melanoma vaccine encompassing a mutated form of the oncogeneB-Raf, which is present in more than 65% of melanomas, and a prostate cancervaccine strain expressing and secreting prostate specific antigen (PSA). Forboth vaccines, the preclinical proof of principle has been demonstrated indistinct animal models and the immunogenicity could be further enhancedcompared to our already published strains (patent application filed in November2006). The GMP production of one of these strains is scheduled for 2007. Uponavailability of GMP material, we intend to initiate a Phase 1 study.

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### ***3.4.8******                     DrugDiscovery***

There is an increasing demand on the worldmarket for active substances. Our internal drug discovery unit provides animportant prerequisite for the provision of new patented active substances,which can then be developed further or licensed to third parties.

The drug discovery unit concentrates on thesearch for active substances for innovative targets which open the door to theintroduction of new therapeutic approaches. Furthermore, this unit searches fornew active substances having improved properties for clinically validatedtargets for which drugs are already being used in humans and which produceinadequate effects, cause severe side effects, are not economical or are notavailable in a patient-friendly form.

To this end, we possess an original substancelibrary for the discovery of active compounds with a comprehensive range ofpromising natural substances which can serve as models for the construction ofsynthetic molecules. The initial tests involve 120,000 samples from ourinternal substance library in the form of high-throughput screening. The hits,i.e. the first active compounds found in the library, are tested further andbuilt up specifically into potential lead structures. Based on two to threelead structures, they are then optimized in a further step to potentialdevelopment candidates.

As a complement to these activities, ouracquisition of Echelon has provided novel biological targets in the lipidsignaling pathway. In addition, Echelon has developed numerous biologicalassays that will permit complementary and synergistic testing of our library ofcompounds.

## **3.5****                               Strategic Alliances**

**Cetrorelix**

**Merck Serono** holds an exclusive worldwide license(ex-Japan) to commercialize Cetrotide® (cetrorelix in the indication IVF/COS/ART).This agreement provides the Company, among other things, with manufacturingincome, royalties on worldwide (ex-Japan) net sales as well as fixed annuallump sum payments until 2010. After 2010, these fixed annual lump sum paymentswill become high, double-digit royalties on the net worldwide sales ofCetrotide® (ex-Japan) with the other terms of theagreement remaining inchanged.

**Solvay Pharmaceuticals Bv.,Weesp, Netherlands**:Since September 2002, Solvay  has anexclusive license to develop, use, commercialize and manufacture cetrorelixworldwide (ex-Japan) and for all indications except for IVF/COS/ART and, asannounced in January 2006, for BPH. Solvay undertakes, at its own cost, allactivities necessary to obtain regulatory and marketing approvals forcetrorelix in endometriosis. Additionally, the agreement provides milestonespayments and low double- digit royalties on future net worldwide (ex-Japan, aswell as sales in IVF/COS/ART and BPH) sales of cetrorelix.

**Nippon Kayaku Co. Ltd of Japan**has the right to manufacture and **Shionogi & Co. Ltd. of Japan** has the right tocommercialize Cetrotide® in Japan. We also granted Shionogi theexclusive rights to develop and commercialize cetrorelix for human use inJapan.

**Ozarelix**

**Spectrum Pharmaceuticals Inc.,Irvine CA, USA**: OnAugust 12, 2004, we entered into a licensing and collaboration agreement withSpectrum for the LHRH antagonist ozarelix. Under the terms of the agreement, wegranted Spectrum an exclusive license to develop and commercialize ozarelix forall potential indications in North America (including Canada and Mexico) andIndia. Upon signature of this agreement, we received an upfront payment whichincluded cash and shares of the capital of Spectrum and we are eligible toreceive payments upon achievement of certain development and regulatorymilestones, in addition to royalties (scale-up royalties from high single tolow double-digit) on potential net sales.

On August 3, 2006, we entered into a licensingand collaboration agreement with **Nippon Kayaku Co. Ltd. ofJapan**. Under the terms of the agreement, we granted Nippon Kayaku anexclusive license to

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develop and market ozarelix for all potentialoncological indications in Japan. In return, we received an upfront paymentupon signature and we are eligible to receive payments upon achievement ofcertain development and regulatory milestones, in addition to low double-digitroyalties on potential net sales. Spectrum is entitled to receive fifty percent of the upfront, milestonepayments and royalties received from Nippon Kayaku.

**Teverelix**

**Ardana Bioscience Ltd.,Edinburgh, Scotland**: In2002, Zentaris granted an exclusive license to Ardana to develop andcommercialize teverelix for all therapeutic uses worldwide with the exceptionof Japan, Korea and Taiwan. On April 2, 2004, Ardana acquired full worldwiderights and was assigned the intellectual property rights relating to teverelixand the underlying microcrystalline suspension technology for the use ofteverelix and LHRH antagonists. The agreement provides, among other things,payment upon signature, annual guaranteed payments until December 2006 androyalties (low single-digit) on future worldwide net sales.

**Perifosine**

Following the acquisition of AOI Pharma, Inc.in January 2004 by **Keryx Biopharmaceuticals,New York, USA**, Keryx has taken over the license and co-operationagreement signed with **AOI Pharma, Inc., NewYork, USA**. Keryx will undertake, at its own cost, all clinicalactivities necessary to obtain regulatory and marketing approvals of perifosinefor all uses in the United States, Canada and Mexico. The agreement provides,among other things, availability of data generated by all parties free ofcharge, milestones and scale-up royalties (from high single to lowdouble-digit) on future net sales in the United States, Canada and Mexico.

**Miltefosine (Impavido****®****)**

Impavido® ispartnered with **German Remedies** in India andBangladesh. It is also partnered with **Roche** fordistribution in Brazil and **Nimrall** inPakistan and Afghanistan. An agreement was signed for South America ex-Brazilwith the company **Tecnofarma**. An agreement wassigned for Iran with the company **B.A. Shiraz** andfor Iraq with the company **Pioneer Pharmaceuticals**.In Germany, distribution of the registered product will be effected by ourpartner **Paesel + Lorei**. Cooperation with ActionMedeor, a German drug aid organization, ensures availability of Impavido® toNon-Governmental Organizations (NGOs) worldwide for public use. Morepartnerships are currently under negotiations to ensure an expeditious registrationand marketing of this innovative product.

**ZEN-027Erucylphosphocholine**

On August 26, 2004, we licensed certain rightsto **Keryx Biopharmaceuticals, New York, USA**to develop and market ZEN-027 in North America,****SouthAfrica, Israel, Australia and New Zealand while keeping rights for the rest ofthe world. The agreement provides, among other things, availability of all datagenerated by all parties free of charge, milestones and scale-up royalties(from high single to low double-digit) on future net sales in the UnitedStates, Canada, Mexico, Israel, New Zeland, Australia and South Africa.

**Growth Hormone Secretagogue(GHS)**

**Ardana Bioscience Ltd.,Edinburgh, Scotland**: In2002, Ardana was granted an exclusive worldwide license to develop andcommercialize the growth hormone secretagogue EP-1572. Ardana undertakes, atits own cost, all activities necessary to obtain regulatory and marketingapprovals for the substance. Furthermore, the agreement provides, among otherthings, milestone payments as well as low double-digit royalties on future networldwide sales of EP-1572.

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**In addition, we have entered intothe following collaborative agreements:**

We signed license agreements dated September17, 2002 with the Tulane Educational Fund (Tulane University, New Orleans,Louisiana, USA) with regard to the substances AN-152, AN-201, AN-238 and AN-215and to bombesin antagonists. Under the agreements, we obtained exclusiveworldwide licenses to use Tulane’s patents to develop, manufacture, market anddistribute these substances.

On October 27, 2004, we announced that we hadentered into a license and collaboration agreement with Tulane University, inNew Orleans, for the development of growth hormone-releasing hormone (GH-RH)antagonists, a novel class of potential anti-cancer agents. Under the terms ofthe agreement, we obtained worldwide exclusive rights to develop andcommercialize GH-RH antagonists for all potential indications, including cancerand endocrine disorders.

On April 21, 2005,****weannounced a new research collaboration with Würzburg/Germany-basedJulius-Maximilians-University on the development of tumor vaccines based onattenuated bacterial carriers. We also acquired patent rights from theuniversity and the inventors covering several aspects of both immunotherapeuticapproaches against cancer as well as bacterial tumor targeting. The goal ofthis collaboration is the development of vaccines against prostate cancer andmelanoma.

Two agreements, one with the Laboratory ofAminoacids, Peptides and Proteins of the University of Montpellier, France, andanother with the Department of Experimental and Environmental Medicine of theUniversity of Milan, Italy, deal with the development of ghrelin antagonists.Two other agreements concerning preclinical development of ghrelin antagonistcompounds and the role of ghrelin in the development of obesity were signed in2006, one with the University of Montreal and another one with the HôpitalLaval in Québec City.

Pursuant to another agreement signed in thefield of oncology with the Institute for Molecular Biotechnology of Jena, and aresearch group at the University of Münster, both in Germany, we have gainedaccess to specific university know-how and screening technologies in the fieldof proteins of the cytoskeleton.

Under all these agreements, we are obligated tosupport some of the research expenses incurred by the university laboratoriesand pay royalties on future sales of the products. In turn, we have retainedexclusive rights for the worldwide exploitation of results generated during thecollaborations.

## **3.6****                               Intellectual Property - Patents**

We believe that wehave a comprehensive intellectual property portfolio that covers the compound,manufacturing process, composition and methods of medical use for its leaddrugs. Our patent portfolio consists of approximately 80 patent families (issued,granted or pending in the U.S., Europe and other jurisdictions).

Of the issued orgranted patents, the seven described below form the core of our patentportfolio with regard to our lead drugs.

·             USpatent 5,198,533 provides protection in the U.S. for the compound cetrorelixand other (LHRH) antagonists as well as their use. This U.S. patent will expirein July 2007. A request for patent term extension for up to five years has beenfiled.

·             USpatent 6,828,415 is a manufacturing process and medical use patent protectingdifferent formulations of cetrorelix. It also specifically protects thelyophilization process used to manufacture cetrorelix, the lyophilizate asprocess product and the use of this drug for *in vitro*fertilization. This U.S. patent will expire in February 2014.

·             USpatent 5,773,032 covers a long-acting formulation of cetrorelix consisting ofpoorly soluble particles of 5 nm to 200 nm in size. The patent not onlyprotects cetrorelix pamoate as a long-acting formulation but also prevents thedevelopment of other LHRH antagonist drugs that are based on this drug-deliverysystem. This U.S. patent will expire in November 2014. A patent term extensionof up to five years may be possible and will be requested upon marketingapproval of Cetrorelix pamoate.

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·             USpatent 6,054,432 represents an important method-of-use patent, which covers atherapeutic regimen for treating BPH, where Cetrorelix is administered at adosage of about 0,5 mg per day over an unlimited time period without effectingtestosterone castration. The U.S. patent will expire in August 2017.

·             USpatent 7,005,418 represents an important method-of-use patent, which covers thetherapeutic management of extrauterine proliferation of endometrial tissue(endometriosis), chronic pelvic pain and/or fallopian tube obstruction byadministering an LHRH antagonist in the form of a short-term inductiontreatment for a period of about 4 to 12 weeks. The U.S. patent will expire inSeptember 2020.

·             USpatent 6,172,050 provides protection in the U.S. for the compound perifosineand other related alkyl phospholipid derivatives as well as their medical use,such as for the treatment of cancer. This U.S. patent expires in July 2013 anda patent-term extension of up to five years will be requested upon receivingmarketing approval of perifosine.

·             USpatent 6,627,609 provides protection in the U.S. for the compound ozarelix andrelated third-generation LHRH antagonists as well as their medical use. ThisU.S. patent will expire in March 2020. A patent term extension of up to fiveyears will be requested upon marketing approval of ozarelix.

The table below lists some of our issued or granted patents in theUnited States and Europe:
| **Patent No**          | ** ** | **Title**                                                                                 | ** ** | **Country**                                             | ** ** | **Expiry Date** |
|------------------------|------------|-------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|-----------------|
| ** **             | ** ** | ** **                                                                                | ** ** | ** **                                              | ** ** | ** **      |
| **Cetrorelix**         | ** ** | ** **                                                                                | ** ** | ** **                                              | ** ** | ** **      |
| **EP 0 299  402** |       | LHRH antagonists                                                                          |       | Germany, Great Britain, France, Switzerland and  others |       | 2008-07-11      |
| **US  5,198,533**      | ** ** | **LHRH antagonists**                                                                      | ** ** | **U.S.**                                                | ** ** | **2007/07/17**  |
| **EP  0 611 572** |       | Process to prepare a cetrorelix lyophilized  composition                                  |       | Germany, Great Britain, France, Switzerland and  others |       | 2014/ 02/04     |
| **US  6,828,415**      | ** ** | **Process to prepare a cetrorelix lyophilized  composition**                              | ** ** | **U.S.**                                                | ** ** | **2014-02-22**  |
| US 6,716,817           |       | Process to prepare a cetrorelix lyophilized  composition                                  |       | U.S.                                                    |       | 2014/02/22      |
| US 6,863,891           |       | Process to prepare a cetrorelix lyophilized  composition                                  |       | U.S.                                                    |       | 2014/02/22      |
| US 6,867,191           |       | Process to prepare a cetrorelix lyophilized  composition                                  |       | U.S.                                                    |       | 2014-02-22      |
| EP 1 150 717           |       | Sustained release salts of pharmaceutically active  peptides and process for production   |       | Germany, Great Britain, France, Switzerland and  others |       | 2020-01-29      |
| EP 1 309 607      |       | Method for the synthesis of peptide salts, their use  and the pharmaceutical preparations |       | Germany, Great Britain, France, Switzerland and  others |       | 2021-08-09      |
| US 6,780,972           |       | Method for the synthesis of peptide salts, their use  and the pharmaceutical preparations |       | U.S.                                                    |       | 2021-08-24      |
| CH 638592              |       | A composition for the sustained and controlled  release of medicamentous substances       |       | Switzerland                                             |       | 2012-07-15      |
| FR 2680109             |       | A composition for the sustained and controlled  release of medicamentous substances       |       | France                                                  |       | 2012-07-21      |
| GB 2257973             |       | A composition for the sustained and controlled  release of medicamentous substances       |       | Great Britain                                           |       | 2012-07-21      |
| US 5,637,568           |       | A composition for the sustained and controlled  release of medicamentous substances       |       | U.S.                                                    |       | 2014-06-10      |
| US 5,773,032           |       | Long-acting injection suspensions and a process for  their preparation                    |       | U.S.                                                    |       | 2014-11-25      |

 

26

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| **Patent No**          | ** ** | **Title**                                                                                                                                       | ** ** | **Country**                                                 | ** ** | **Expiry Date** |
|------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|-----------------|
| ** **             | ** ** | ** **                                                                                                                                      | ** ** | ** **                                                  | ** ** | ** **      |
| **EP  0 732 941** | ** ** | **Long-acting injection suspensions and a process  for their preparation**                                                                      | ** ** | **Germany, Great Britain, France, Switzerland and  others** | ** ** | **2014-11-25**  |
| EP 6 571 70       |       | Products for administering an initial high dose of  cetrorelix and producing a combination package                                              |       | Germany, Great Britain, France, Switzerland and others      |       | 2014-11-24      |
| US 5,663,145           |       | Products for administering an initial high dose of  cetrorelix and producing a combination package                                              |       | U.S.                                                        |       | 2014-12-08      |
| US 6,054,432           |       | Means for treating prostate hypertrophy and prostate  cancer                                                                                    |       | U.S.                                                        |       | 2017-08-07      |
| US 5,998,377           |       | Means for treating prostate hypertrophy and prostate  cancer                                                                                    |       | U.S.                                                        |       | 2017-08-07      |
| US 6,071,882           |       | Means for treating prostate hypertrophy and prostate  cancer                                                                                    |       | U.S.                                                        |       | 2017-08-07      |
| US 6,300,313           |       | Means for treating prostate hypertrophy and prostate  cancer                                                                                    |       | U.S.                                                        |       | 2017-08-07      |
| US 7,005,418           |       | Method for the therapeutic management of  extrauterine proliferation of endometrial tissue, chronic pelvic pain and  fallopian tube obstruction |       | U.S.                                                        |       | 2020-09-21      |
|                   |       |                                                                                                                                            |       |                                                        |       |            |
| **Perifosine**         | ** ** | ** **                                                                                                                                      | ** ** | ** **                                                  | ** ** | ** **      |
| **EP  0 579 939** |       | Methods of using therapeutic phospholipid  derivatives                                                                                          |       | Germany, Great Britain, France, Switzerland and  others     |       | 2013-06-03      |
| **US  6,172,050**      | ** ** | **Methods of using therapeutic phospholipid  derivatives**                                                                                      | ** ** | **U.S.**                                                    | ** ** | **2013-07-07**  |
| US 6,479,472           |       | Methods of using therapeutic phospholipid derivatives                                                                                           |       | U.S.                                                        |       | 2013-07-07      |
| US 6,903,080           |       | Methods of using therapeutic phospholipid  derivatives                                                                                          |       | U.S.                                                        |       | 2013-07-07      |
|                   |       |                                                                                                                                            |       |                                                        |       |            |
| **Ozarelix**           | ** ** | ** **                                                                                                                                      | ** ** | ** **                                                  | ** ** | ** **      |
| **EP  1 163 264** |       | LHRH antagonists having improved solubility  properties                                                                                         |       | Germany, Great Britain, France, Switzerland and others      |       | 2020-03-11      |
| **US  6,627,609**      | ** ** | **LHRH antagonists having improved solubility  properties**                                                                                     | ** ** | **U.S.**                                                    | ** ** | **2020-03-14**  |

 

## Bold itemsrepresent core patents.

## **3.7****                               Risk Factors**

Our business entails significant risks. Inaddition to the usual risks associated with a business, you will find on pages17 to 19 of our annual Management’s Discussion and Analysis (“MD&A”) datedMarch 5, 2007, for the financial year ended December 31, 2006, a generaldescription of certain significant risk factors which are applicable to ourbusiness, which pages are incorporated by reference into this AnnualInformation Form.

# **ITEM 4.****                                                     DIVIDENDS**

## **4.1****                               Dividends**

Since our incorporation, we have not paid anydividends and we do not anticipate paying any dividends in the foreseeablefuture.

27

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# **ITEM 5.****                                                     GENERALDESCRIPTION OF CAPITAL STRUCTURE**

## **5.1****                               General Description of Capital Structure**

Our authorized share capital consists of anunlimited number of shares of the following classes:

·                  *Common Shares*: The holders of the Common Shares are entitledto one (1) vote for each Common Share held by them at all meetings ofshareholders, except meetings at which only shareholders of a specified classof shares are entitled to vote. In addition, the holders are entitled toreceive dividends if, as and when declared by our Board of Directors on theCommon Shares. Finally, the holders of the Common Shares are entitled toreceive the remaining property of the Company upon any liquidation, dissolutionor winding-up of the affairs of the Company, whether voluntary or involuntary.

·                  *Preferred Shares*: The First and Second Preferred Shares areissuable in series with rights and privileges specific to each class. Theholders of Preferred Shares are not entitled to receive notice of or to attendor vote at meetings of shareholders.

All classes are without nominal or par value.On March 1, 2007, there were 53,179,470 Common Shares and no Preferred Sharesissued and outstanding.

# **ITEM 6.****                                                     MARKETFOR SECURITIES**

## **6.1****                               Trading Price and Volume**

Our Common Shares are listed and posted fortrading on the Toronto Stock Exchange (“TSX”) and are quoted on the NASDAQGlobal Market (“NASDAQ”).

The following table sets forth, for the periodsindicated, the reported high, low, and closing sale prices (in Canadiandollars) and the volume of our Common Shares traded on the TSX.
|                | ** ** | **TSX**                    | ** ** | ** ** |
|----------------|------------|----------------------------|------------|------------|
| ** **     | ** ** | **(in Canadian  dollars)** | ** ** | ** ** |
| **Month**      | ** ** | **High**                   | ** ** | **Low**    | ** ** | **Close** | ** ** | **Volume** |
| January 2006   |       | 7.61                       |       | 5.85       |   | 6.88 |   | 2,646,212 |
| February 2006  |       | 7.72                       |       | 6.80       |   | 6.92 |   | 2,070,682 |
| March 2006     |       | 7.80                       |       | 6.67       |   | 7.80 |   | 2,749,435 |
| April 2006     |       | 8.79                       |       | 7.71       |   | 7.94 |   | 2,981,808 |
| May 2006       |       | 8.23                       |       | 6.76       |   | 7.44 |   | 3,048,662 |
| June 2006      |       | 7.79                       |       | 6.01       |   | 6.43 |   | 2,478,469 |
| July 2006      |       | 6.60                       |       | 5.52       |   | 6.20 |   | 1,689,565 |
| August 2006    |       | 6.41                       |       | 5.76       |   | 6.00 |   | 1,773,728 |
| September 2006 |       | 6.67                       |       | 5.58       |   | 5.72 |   | 2,302,584 |
| October 2006   |       | 6.14                       |       | 5.41       |   | 5.73 |   | 3,787,777 |
| November 2006  |       | 6.17                       |       | 5.52       |   | 6.03 |   | 1,795,256 |
| December 2006* |       | 7.11                       |       | 4.51       |   | 4.72 |   | 3,729,266 |

 

28

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The following table sets forth, for the periodsindicated, the reported high, low, and closing sale prices (in U.S. dollars)and the volume of our Common Shares traded on the NASDAQ.
|                | ** ** | **NASDAQ**            | ** ** | ** ** |
|----------------|------------|-----------------------|------------|------------|
| ** **     | ** ** | **(in U.S. dollars)** | ** ** | ** ** |
| **Month**      | ** ** | **High**              | ** ** | **Low**    | ** ** | **Close** | ** ** | **Volume** |
| January 2006   |       | 6.55                  |       | 5.05       |   | 6.03 |   | 1,090,817 |
| February 2006  |       | 6.69                  |       | 5.86       |   | 6.08 |   | 812,897 |
| March 2006     |       | 6.67                  |       | 5.82       |   | 6.63 |   | 1,425,056 |
| April 2006     |       | 7.55                  |       | 6.60       |   | 7.08 |   | 1,066,792 |
| May 2006       |       | 7.45                  |       | 6.01       |   | 6.75 |   | 1,055,170 |
| June 2006      |       | 7.10                  |       | 5.40       |   | 6.00 |   | 827,786 |
| July 2006      |       | 6.09                  |       | 4.90       |   | 5.47 |   | 453,410 |
| August 2006    |       | 5.74                  |       | 4.91       |   | 5.45 |   | 297,290 |
| September 2006 |       | 6.02                  |       | 5.00       |   | 5.13 |   | 587,310 |
| October 2006   |       | 5.47                  |       | 4.78       |   | 5.10 |   | 555,140 |
| November 2006  |       | 5.65                  |       | 4.88       |   | 5.30 |   | 791,643 |
| December 2006* |       | 6.18                  |       | 3.93       |   | 4.05 |   | 1,756,349 |

 

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(*)         On January 2, 2007, we effected a one-timespecial distribution in kind of all 11,052,996 Subordinate Voting Shares of thecapital of Atrium on a *prorate* basisto our shareholders. The “ex-distribution” date for the special distributionwas December 27, 2006.

# **ITEM 7.****                                                     DIRECTORSAND OFFICERS**

## **7.1****                               Directors**

Our Board of Directors currently consists ofeleven directors. Each director remains in office until the following annualshareholders’ meeting or until the election of his or her successor, unless heor she resigns or his or her office becomes vacant as a result of his or herdeath, removal or any other cause.

The following table sets forth, for eachdirector, the name, place of residence, principal occupation, securityholdings, and the period during which he or she has acted as a director:
| **Name and Place   of Residence** | ** ** | **Principal Occupation**                                                                                   | ** ** | **Director  Since** | ** ** | **Number and Percentage of   Common Shares Held in the   Company** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|-----------------------------------------------------------------------------------------------------------------|------------|
|                                                  |       |                                                                                                            |       |                |       |                                                                                                            |       |   |   |
| Marcel Aubut   Quebec, Canada                         |       | Managing  Partner   Heenan Blaikie Aubut   (law firm)                                                           |       | 1996                |       | 57,500                                                                                                          |       | 0.11 | % |
|                                                  |       |                                                                                                            |       |                |       |                                                                                                            |       |   |   |
| Stormy Byorum(1)   New York, USA                      |       | Senior  Managing Director   Stephens Cori Capital Advisors,   (a full service, privately owned investment bank) |       | 2001                |       | 12,000                                                                                                          |       | — |   |
|                                                  |       |                                                                                                            |       |                |       |                                                                                                            |       |   |   |
| José P. Dorais(3)   Quebec, Canada               |       | Partner    Miller Thomson Pouliot LLP   (law firm)                                                              |       | 2006                |       | —                                                                                                          |       | — |   |
|                                                  |       |                                                                                                            |       |                |       |                                                                                                            |       |   |   |
| Éric Dupont, PhD(2)   Quebec, Canada             |       | Executive  Chairman of the Board   Æterna Zentaris Inc.                                                    |       | 1991                |       | 3,767,413                                                                                                       |       | 7.1 | % |
|                                                  |       |                                                                                                            |       |                |       |                                                                                                            |       |   |   |
| Prof. Dr. Jürgen Engel  Frankfurt, Germany       |       | Executive  Vice President, Global R&D and Chief   Operating Officer   Æterna Zentaris Inc.             |       | 2003                |       | 31,279                                                                                                          |       | 0.06 | % |

 

29

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| **Name and Place   of Residence** | ** ** | **Principal Occupation**                                                                                                                                                 | ** ** | **Director  Since** | ** ** | **Number and Percentage of   Common Shares Held in the   Company** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|-----------------------------------------------------------------------------------------------------------------|------------|
|                                                  |       |                                                                                                                                                                          |       |                |       |                                                                                                            |       |   |   |
| Jürgen Ernst(2)   Brussels, Belgium              |       | Vice  Chairman of the Board   Æterna Zentaris Inc.   Former Managing Director   Pharmaceutical Sector of Solvay S.A.   (international chemical and pharmaceutical group) |       | 2005                |       | 8,850                                                                                                           |       | — |   |
|                                                  |       |                                                                                                                                                                          |       |                |       |                                                                                                            |       |   |   |
| Gilles Gagnon   Quebec, Canada                        |       | President  and Chief Executive Officer   Æterna Zentaris Inc.                                                                                                            |       | 2002                |       | 70,617                                                                                                          |       | 0.13 | % |
|                                                  |       |                                                                                                                                                                          |       |                |       |                                                                                                            |       |   |   |
| Pierre Laurin, PhD(2)   Quebec, Canada                |       | Executive  in Residence   HEC Montréal   (management faculty of university)                                                                                              |       | 1998                |       | 11,200                                                                                                          |       | — |   |
|                                                  |       |                                                                                                                                                                          |       |                |       |                                                                                                            |       |   |   |
| Gérard Limoges, FCA(1)  Quebec, Canada           |       | Corporate  Director                                                                                                                                                           |       | 2004                |       | 5,000                                                                                                           |       | — |   |
|                                                  |       |                                                                                                                                                                          |       |                |       |                                                                                                            |       |   |   |
| Pierre MacDonald(1)(2)  Quebec, Canada                |       | Chairman  of the Board   Eurocopter Canada Ltd.   (helicopters manufacturer)                                                                                                  |       | 2000                |       | 11,500                                                                                                          |       | — |   |
|                                                  |       |                                                                                                                                                                          |       |                |       |                                                                                                            |       |   |   |
| Gerald J. Martin   California, USA                    |       | Corporate  Director   Former Vice President, Corporate Licensing and   Technology Alliances at Abbott Laboratories Inc.                                                       |       | 2006                |       | —                                                                                                          |       | — |   |

 

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(1)           Member of the Audit Committee.

(2)           Member of the Corporate Governance,Nominating and Human Resources Committee.

(3)           Mr.Dorais was appointed director as the nominee proposed by SGF Santé Inc. on May3, 2006.

Notes:

Mr. MarcelAubut served as a director of Albums DF Ltée, a privately held company based inLongueuil, Quebec, from September 5, 1997 to September 16, 2003, which companybecame bankrupt on December 6, 2003.

Mr. Pierre Laurinserved as a director of Microcell Telecommunications Inc. (“Microcell”) fromMay 1999 until May 2003. Microcell entered into a Plan of Reorganization and ofCompromise and Arrangement with its creditors and shareholders effective May 1,2003 pursuant to the *Companies’ CreditorsArrangement Act* (Canada). Mr. Laurin was a member of the SpecialCommittee of the Board of Directors of Microcell created in connection with theforegoing restructuring.

Mr. PierreMacDonald served as a director of Slater Steel Inc. (“SSI”), a manufacturer ofspecialty steel products from February 1998 until August 2004. SSI and itssubsidiaries filed for creditor protection under the *Companies’Creditors Arrangement Act* (Canada) and under Chapter 11 of the USBankruptcy Code on June 2, 2003, and they have conducted an orderly wind-down.

## **7.2****                               Executive Officers**

The table below sets forth the name, place ofresidence and the position with Æterna Zentaris of each of its executiveofficers on the date hereof.
| **Name and  Place   of Residence**                | ** ** | **Principal Occupation**                                                                |
|---------------------------------------------------|------------|-----------------------------------------------------------------------------------------|
|                                              |       |                                                                                    |
| Éric Dupont, PhD    Quebec, Canada           |       | Executive Chairman of the Board                                                         |
|                                              |       |                                                                                    |
| Gilles Gagnon   Quebec, Canada                    |       | President and Chief Executive Officer                                                   |
|                                              |       |                                                                                    |
| Prof. Dr. Jürgen  Engel   Frankfurt, Germany |       | Executive Vice President, Global Research   and Development and Chief Operating Officer |
|                                              |       |                                                                                    |

 

30

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| **Name and  Place   of Residence**             | ** ** | **Principal Occupation**                                              |
|------------------------------------------------|------------|-----------------------------------------------------------------------|
|                                           |       |                                                                  |
| Dr. Eckhard  Günther   Frankfurt, Germany |       | Vice President, Drug Discovery                                        |
|                                           |       |                                                                  |
| Mario Paradis,  CA   Quebec, Canada            |       | Vice President, Finance & Administration and  Corporate Secretary |
|                                           |       |                                                                  |
| Dr. Matthias  Rischer   Frankfurt, Germany     |       | Vice President, Pharmaceutical Development                            |
|                                           |       |                                                                  |
| Dr. Manfred  Peukert   Frankfurt, Germany      |       | Vice President, Medical Affairs                                       |
|                                           |       |                                                                  |
| Dennis Turpin,  CA   Quebec, Canada            |       | Vice President and Chief Financial Officer                            |

 

During the past five years, the directors andexecutive officers mentioned above have held their present principaloccupations, except as indicated below.

Prof. Dr. Jürgen Engel was, prior to December2002, Chief Executive Officer of Zentaris AG after having been head ofCorporate Research and Development, including drug discovery, at Asta Medica AGin Frankfurt, Germany.

Dr. Eckhard Günther was, prior to December2002, Head of drug discovery at Zentaris AG after having been at Asta Medica AGin Frankfurt, Germany, for many years as a researcher as well as a manager.

Mario Paradis was appointed Vice President,Finance & Administration on May 2, 2006 and Corporate Secretary on February27, 2004. He joined the Company as Finance Director in June 1999 and was namedSenior Finance Director in 2001.

Dr. Manfred Peukert was, prior to December2002, Head of Medical Affairs at Zentaris AG, after having been Global Head ofMedical Research at Asta Medica AG in Frankfurt, Germany. He has a broadexperience in many therapeutic areas with a specific expertise in themanagement of medical research projects in oncology and endocrinology.

Dr. Matthias Rischer was, prior to December2002, Head of the Pharmaceutical Development at Zentaris AG, after having takenmanagerial positions in Pharmaceutical Development at Asta Medica AG inFrankfurt, Germany.

As of March 1, 2007, our directors andexecutive officers, as a group, beneficially owned or exercised control ordirection over, directly or indirectly, approximately 3,983,329 Common Shares,representing 7.5% of our issued and outstanding Common Shares.

# **ITEM 8.****                                                     LEGALPROCEEDINGS**

## **8.1****                               Legal Proceedings**

There are no outstanding material legalproceedings to which Æterna Zentaris or any of our subsidiaries is a party,nor, to our knowledge, are any such proceedings contemplated.

# **ITEM 9.****                                                     INTERESTOF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS**

To the best of our knowledge, as of March 1,2007, (i) none of our directors or executive officers, (ii) no person orcompany that is the direct or indirect beneficial owner of, or who exercisescontrol or direction 

31

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over, more than 10 percent of our CommonShares, and (iii) no associate or affiliate of any of the persons or companiesreferred to in (i) and (ii) above, has had any material interest, direct orindirect, in any transaction within the three most recently completed financialyears or during the current financial year that has materially affected or willmaterially affect us, except as set forth below.

In February 2006, Solidarity Fund (QFL) and SGFSanté Inc., each of whom holds more than 10% of the outstanding Common Sharesof the Company, exercised its right to convert its portion of a convertibleloan under a loan agreement originally entered into among the Company,Solidarity Fund (QFL) and SGF Santé Inc. in 2003, pursuant to which each of theforegoing shareholders loaned the Company a principal amount of CAN$12.5million. Upon conversion by Solidarity Fund (QFL) and SGF Santé Inc.of both all principal and interest due under the convertible loan agreement,the Company issued to each of them 3,477,544 Common Shares in accordance withthe provisions of the agreement and additional arrangements. Following theconversion and share issuance described above, there remains no amount ofindebtedness outstanding under the loan agreement.

# **ITEM 10.****                                              TRANSFERAGENT AND REGISTRAR**

## **10.1****                        Transfer Agent and Registrar**

The name andprincipal address of the registrar and transfer agent for the Common Shares,being the only class of our publicly listed securities, is indicated below:

Computershare Trust Company

1500 University Street, 7th Floor

Montreal, Quebec

Canada  H3A 3S8

# **ITEM 11.****                                              MATERIALCONTRACTS**

## **11.1****                       ****Material Contracts**

Except forcontracts entered into in the ordinary course of business, the only materialcontract entered into by us during the financial year ended December 31, 2006is the agreement dated September 22, 2006, whereby the Company, Atrium and anumber of other selling shareholders entered into an underwriting agreementwith a syndicate of underwriters led by RBC Dominion Securities Inc. providingfor the sale by the Company and such other selling shareholders to theunderwriters of an aggregate of 3,930,000 Subordinate Voting Shares of thecapital of Atrium at a price of Cdn$15.80 per share (the “UnderwritingAgreement”), of which the Corporation agreed to sell to the underwriters3,485,000 Subordinate Voting Shares of the capital of Atrium. The secondaryoffering transaction contemplated by the Underwriting Agreement closed onOctober 18, 2006. A complete copy of the Underwriting Agreement has been filedon the SEDAR website at www.sedar.com under the Company’s profile.

# **ITEM 12.****                                              INTERESTSOF EXPERTS AND AUDIT COMMITTEE DISCLOSURE**

## **12.1****                       ****Names and Interest of Experts**

The Company’s auditors are PricewaterhouseCoopersLLP, Chartered Accountants. They have prepared an independent auditors’ reportdated March 2, 2007 in respectof the Company’s consolidated financial statements as at December 31, 2006 and2005, with accompanying notes as at and for each of the year in the three-yearperiod ended December 31, 2006. PricewaterhouseCoopers LLP has advised thatthey are independent with respect to the Company within the meaning of theRules of Professional Conduct of the Institute of Chartered Accountants of Quebec and the rules of the US Securities and Exchange Commission.

32

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## **12.2****                       ****Audit Committee Disclosure**

Multilateral Instrument 52-110– *Audit Committees* (“MI 52-110”)requires issuers to disclose in their annual information forms certaininformation with respect to the existence, charter, composition, and educationand experience of the members of their Audit Committees, as well as all feespaid to external auditors. The Audit Committee Charter is attached asSchedule A to this annual Information Form and is also accessible on the Company’s Web site at *www.aeternazentaris.com*.

**Compositionof the Audit Committee**

Ms. Stormy Byorum, Mr. GérardLimoges, FCA, who is the Chair of the Committee, andMr. Pierre MacDonald are the members of the Company’s AuditCommittee, each of whom is independent and financially literate within themeaning of MI 52-110.

**Educationand Relevant Experience**

The education and relevantexperience of each of the members of the Audit Committee are described below.

**Stormy Byorum** – Ms. Byorum iscurrently Senior Managing Director of Stephens Cori Capital Advisors, astrategic and financial advisory services company. Before 1996, Ms. Byorum heldvarious positions at Citicorp. Ms. Byorum holds a Master’s of BusinessAdministration (MBA) degree from the University of Pennsylvania.

**Gérard Limoges, FCA** – Mr.Limoges served as the Deputy Chairman of Ernst & Young LLP Canada until hisretirement in September 1999. After a career of 37 years with Ernst &Young, Mr. Limoges has been devoting his time as a director of a number ofcompanies. Mr. Limoges began his career with Ernst & Young in Montreal in1962. After graduating from the Management School of Université de Montréal(HEC Montréal) in 1966, he became a chartered accountant and partner of Ernst& Young in 1971.

**PierreMacDonald** – Mr.MacDonald was Vice President of James Bay Energy Corporation where he wasresponsible for administration, finance, internal audit and informationsystems. He subsequently was the Senior Vice President for Eastern Canada forBank of Montreal, a position which involved the review and evaluation of thefinancial statements and creditworthiness of borrowers in a wide variety ofindustries. He then became Vice Chairman of the Treasury Board of theGovernment of Quebec. Mr. MacDonald served as the Chairman of the AuditCommittee of Teleglobe Inc. for six years. He recently completed a term of sixyears as Chairman of the Risk Management Committee and member of the AuditCommittee of the Export Development Corporation. Mr. MacDonald receivedBachelor of Arts, Bachelor of Commerce and Masters of Commerce degrees fromLaval University in Quebec City.

**Pre-ApprovalPolicies and Procedures**

Form 52-110F1 requires theCompany to disclose whether its Audit Committee has adopted specific policiesand procedures for the engagement of non-audit services and to prepare asummary of these policies and procedures. The mandate of the Audit Committee(attached as Schedule A to this Annual Information Form) provides that it issuch committee’s responsibility to approve all audit engagement fees and termsas well as reviewing policies for the provision of non-audit services by theexternal auditors and, when required, the framework for pre-approval of suchservices. The Audit Committee delegates to its Chairman the pre-approval ofsuch non-audit fees.

**ExternalAuditor Service Fees**

In addition to performing the audit of the Company’s consolidatedfinancial statements and its subsidiaries, PricewaterhouseCoopers LLP provided other services to theCorporation and its subsidiaries and billed the Company and its subsidiariesthe following fees for each of the Company’s two most recently completedfinancial years. Fees for the financial year ended December 31, 2006 excludeall such fees 

33

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billed by PricewaterhouseCoopers LLP to the Company’s former subsidiary,Atrium, since, on October 18, 2006, the Company initiated the divesture of itsinterest in Atrium upon closing of a secondary offering and completed thespin-off by distributing its remaining investment in Atrium to all shareholderson January 2, 2007.
| **Fees**               | ** ** | **Financial Year Ended  December 31, 2006  $** | ** ** | **Financial Year Ended  December 31, 2005  $** | ** ** |
|------------------------|------------|--------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| Audit Fees(1)          |       | 252,084                                                            |       | 576,757                                                            |       |
|                   |       |                                                               |       |                                                               |       |
| Audit-Related  Fees(2) |       | 149,873                                                            |       | 10,220                                                             |       |
|                   |       |                                                               |       |                                                               |       |
| Tax Fees(3)            |       | 29,084                                                             |       | 181,029                                                            |       |
|                   |       |                                                               |       |                                                               |       |
| All Other  Fees(4)     |       | 56,753                                                             |       | 193,554                                                            | (5)        |
|                   |       |                                                               |       |                                                               |       |
| Total Fees:            | ** ** | **487,794**                                                        | ** ** | **961,560**                                                        | ** ** |

 

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(1)          Refers to the aggregate fees billed by theCompany’s external auditor for audit services.

(2)          Refers to the aggregate fees billed forassurance and related services by the Company’s external auditor that arereasonably related to the performance of the audit or review of the Company’sfinancial statements and are not reported under (1) above, includingprofessional services rendered by the Company’s external auditor for accountingconsultations on proposed transactions, and consultations related to accountingand reporting standards.

(3)          Refers to the aggregate fees billed forprofessional services rendered by the Company’s external auditor for taxcompliance, tax advice and tax planning.

(4)          Refers to the aggregate fees billed forproducts and services provided by the Company’s external auditor, other thanthe services reported under (1), (2) and (3) above.

(5)          These fees were primarily incurred inconnection with the preparation of a prospectus filed by the Company’ssubsidiary,Atrium, as part of its initial public offering in April 2005.

# **ITEM 13.****                                              ADDITIONALINFORMATION**

## **13.1****                        Additional Information**

Additional information, including directors’and officers’ remuneration and indebtedness, the principal securityholders ofthe Company and securities authorized for issuance under equity compensationplans, is contained in our Management Proxy Circular dated March 9, 2007,available on SEDAR at www.sedar.com. Additional financial information isprovided in the Company’s consolidated financial statements and Management’sDiscussion and Analysis for the financial year endedDecember 31, 2006.

All information incorporated by reference intothis Annual Information Form is contained or included in one of our continuousdisclosure documents filed with the Canadian securities regulatory authoritieswhich may be viewed on SEDAR at www.sedar.com. Where a section of this AnnualInformation Form incorporates by reference information from one of our othercontinuous disclosure documents, such section makes specific reference to thedocument in which such information is originally contained or included, as wellas to the relevant page and/or section.

# **ITEM 14.****                                              FORWARD-LOOKINGSTATEMENTS**

## **14.1****                        Forward-Looking Statements**

Certainstatements in this document are forward-looking and prospective.Forward-looking statements generally can be identified by the use offorward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,”“anticipate,” “plan,” “foresee,” “believe” or “continue” or the negatives ofthese terms or variations of them or similar terminology. Forward-lookingstatements involve known and unknown risks and uncertainties, which may causeour actual results in future periods to differ materially from forecastedresults. Those risks include, among others, business conditions in thepharmaceutical and related 

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industries,as well as the general economy, changes in governmental regulation, changes inthe healthcare industry, competitive factors such as those influencingexpenditures for research and development, or the availability of markets forthe Company’s products. Investors are cautioned not to place undue reliance onthese forward-looking statements, which reflect management’s analysis only asof the date of this document.

There can be noassurance that the plans, intentions or expectations upon which theseforward-looking statements are based will occur. While the Company anticipatesthat subsequent events and developments may cause the Company’s views tochange, the Company specifically disclaims any obligation to update theseforward-looking statements. The forward-looking statements contained herein areexpressly qualified in their entirety by this cautionary statement. Theforward-looking statements included in this document are made as of the datehereof and the Company undertakes no obligation to publicly update suchforward-looking statements to reflect new information, subsequent events orotherwise.

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**SCHEDULEA – AUDIT COMMITTEE CHARTER**

**1.****                          ****MISSIONSTATEMENT**

TheAudit Committee (the “Committee”) will assist the Board of Directors infulfilling its oversight responsibilities. The Audit Committee will review thefinancial reporting process, the system of internal control, the audit process,and the company’s process for monitoring compliance with laws and regulationsand with the Code of Ethical Conduct. In performing its duties, the Committeewill maintain effective working relationships with the Board of Directors,management, and the external auditors. To effectively perform his or her role,each Committee member will obtain an understanding of the detailedresponsibilities of Committee membership as well as the company’s business,operations, and risks.

Thefunction of the Committee is oversight and while it has the responsibilitiesand powers set forth in this charter, it is neither the duty of the Committeeto plan or to conduct audits or to determine that the company’s financialstatements are complete, accurate and in accordance with generally acceptedaccounting principles, nor to maintain internal controls and procedures.

**2.****                          ****POWERS**

TheBoard authorizes the Audit Committee, within the scope of its responsibilities,to:

·                            Performactivities within the scope of its charter.

·                            Engageindependent counsel and other advisers as it deems necessary to carry out itsduties.

·                            Setand pay the compensation for any advisors it employs.

·                            Ensurethe attendance of company officers at meetings as appropriate.

·                            Haveunrestricted access to members of management, employees and relevantinformation.

·                            Communicatedirectly with the internal and external auditors.

**3.****                          ****COMPOSITION**

The Audit Committee shall beformed of three members, each of which shall be a director not holding amanagement function.

Each member shall provide auseful contribution to the Committee.

All members shall beindependent of management.

All members must befinancially literate.

The chairperson of the AuditCommittee shall be appointed by the Board from time to time.

The term of the mandate ofeach member shall be one year.

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The quorum requirement for anymeeting shall be two members.

The secretary of the AuditCommittee shall be the secretary of the company or any other individualappointed by the Board.

**MEETINGS**

Ifdeemed necessary, the Audit Committee may invite other individuals (such as theExecutive Vice President and COO or the Vice President and CFO).

Externalauditors shall be invited, if needed, to make presentations to the AuditCommittee.

TheCommittee shall meet at least four times a year. Special meetings may be heldif needed. If deemed necessary, external auditors may invite members to attendany meeting.

TheAudit Committee will meet with the external auditors at least once a year withoutmanagement presence.

Theminutes of each meeting shall be recorded.

**4.****                          ****ROLE ANDRESPONSIBILITIES**

#### **A.****                     FinancialInformation**

i)                            Reviewsignificant accounting and reporting issues, including recent professional andregulatory pronouncements, and understand their impact on the financialstatements.

ii)                         Ask managementand external auditors about significant risks and exposures and the plans tominimize such risks.

iii)                    Review the unaudited interimfinancial statements, the audited annual financial statements in addition toany documents which accompany such financial statements, such as the report ofthe external auditors, prior to filing or disclosure. Determine whether theyare complete and consistent with the information known to Committee members,and assess whether the financial statements reflect appropriate accountingprinciples and recommend their approval to the Board of Directors.

iv)                     Review and recommend forapproval by the Board, all public disclosure documents containing audited orunaudited financial information, including Management’s Discussion and Analysisof financial condition, all sections of the Annual Report and press releasesconcerning annual and interim financial results, and consider whether theinformation is adequate and consistent with members’ knowledge about thecompany and its operations.

v)                        Review thecompliance of the President and Chief Executive Officer and of the ChiefFinancial Officer certification on the company’s controls and proceduresdisclosure of information and the attestation by management of the financialreports.

vi)                     Pay particular attention tocomplex and/or unusual transactions such as restructuring charges andderivative disclosures.

vii)                  Focus on judgmental areas suchas those involving valuation of assets and liabilities including, for example,the accounting for and disclosure of: obsolete or slow-moving inventory; loanlosses; warranty, product, and environmental liability; litigation reserves andother commitments and contingencies.

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viii)               Meet with management and theexternal auditors to review the financial statements and the results of theaudit.

ix)                     Consider management’s handlingof proposed audit adjustments identified by the external auditors.

x)                          Ensure that theexternal auditors communicate certain required matters to the Committee.

xi)                     Be briefed on how managementdevelops and summarizes quarterly financial information, the extent to whichthe external auditors review quarterly financial information, and whether thatreview is performed on a pre- or post-issuance basis.

xii)                  Meet with management and, if apre-issuance review was completed, with the external auditors, either bytelephone or in person, to review the interim financial statements and theresults of the review.

xiii)              To gain insight into the fairnessof the interim statements and disclosures, obtain explanations from managementon whether:

·                  Actual financialresults for the quarter or interim period varied significantly from budgeted orprojected results;

·                  Changes infinancial ratios and relationships in the interim financial statements areconsistent with changes in the company’s operations and financing practices;

·                  Generallyaccepted accounting principles have been consistently applied;

·                  There are anyactual or proposed changes in accounting or financial reporting practices;

·                  There are anysignificant or unusual events or transactions;

·                  The company’sfinancial and operating controls are functioning effectively;

·                  The company hascomplied with the terms and conditions of loan agreements or securityindentures; and

·                  The interimfinancial statements contain adequate and appropriate disclosures.

xiv)             Ensure that the externalauditors communicate certain required matters to the Committee.

#### **B.****                     ExternalAudit**

i)                        Review theprofessional qualification of the auditors (including background and experienceof partner and auditing personnel).

ii)                      Consider theindependence of the external auditor and any potential conflicts of interest.

iii)                  Review on an annual basis theperformance of the external auditors and make recommendations to the Board fortheir compensation, their appointment, retention and termination of theirappointment.

iv)                 Oversee the work of theexternal auditors, including the resolution of disagreements between managementand the external auditors regarding financial reporting.

v)                     Make sure to receive periodicreports from the external auditors.

vi)                  Review the external auditors’scope and plan of the annual audit, as well as the approach for the currentyear in light of the company’s present circumstances and changes in regulatoryand other requirements.

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vii)              Annually, or more frequentlyas may be required, consult with the external auditors, without the presence ofmanagement, as to internal controls, the fullness and accuracy of the financialstatements, any significant difficulties encountered during the course of theaudit or access to required information, the quality of financial personnel,the level of co-operation received from management any unresolved materialdifferences of opinion or disputes.

viii)           Discuss with the externalauditor any audit problems encountered in the normal course of audit work,including any restriction on audit scope or access to information.

ix)                   Discuss with the externalauditor the appropriateness of the accounting policies applied in the company’sfinancial reports and whether they are considered as aggressive, balanced orconservative.

x)                      Approve all auditengagement fees and terms as well as reviewing policies for the provision ofnon-audit services by the external auditors and, when required, the frameworkfor pre-approval of such services.

xi)                   Ensure the company hasappropriate policies regarding the hiring of audit firm personnel for seniorpositions after they have left the audit firm.

#### **C.****                     Internal Control**

i)                        Evaluate whethermanagement is setting the appropriate tone at the top by communicating theimportance of internal controls and ensuring that all individuals possess anunderstanding of their roles and responsibilities.

ii)                      Understand thecontrols and processes implemented by management to ensure that the financialstatements derive from the underlying financial systems, comply with relevantstandards and requirements, and are subject to appropriate management review.

iii)                  Satisfy itself as to the adequacyof company’s review procedures regarding disclosure of other financialinformation.

iv)                   Gain an understanding of thecurrent areas of financial risk and how these are being handled by themanagement.

v)                        Focus on theextent to which management reviews computer systems and applications, thesecurity of such systems and applications, and the contingency plan forprocessing financial information in the event of a systems breakdown.

vi)                   Gain an understanding ofwhether internal control recommendations made by external auditors have beenimplemented by management.

vii)                  Ensure that the externalauditors keep the Audit Committee informed about fraud, illegal acts,deficiencies in internal control, and any other matter deemed appropriate.

viii)               Establish procedures for (1)the receipt, retention and treatment of complaints received by the Companyregarding accounting, internal accounting controls or auditing matters, and (2)for the confidential, anonymous submission by Company employees of concernsregarding questionable accounting or auditing matters.

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#### **D.****                     Corporategovernance**

i)                        Review theeffectiveness of the system for monitoring compliance with laws and regulationsand the results of management’s investigation and follow-up (includingdisciplinary action) on any fraudulent acts or accounting irregularities.

ii)                      Periodicallyobtain updates from management, general counsel, and tax director regardingcompliance.

iii)                  Be satisfied that allregulatory compliance matters have been considered in the preparation ofthe financial statements.

iv)                  Review the findings of anyexaminations by regulatory agencies.

v)                     Ensure that a Code of EthicalConduct is formalized in writing and that all employees are aware of it.

vi)                  Review periodically thecontent of the Code of Ethical Conduct and make sure employees are informed ofamendments.

vii)               Evaluate whether management issetting the appropriate tone at the top by communicating the importance of theCode of Ethical Conduct and the guidelines for acceptable business practices.

viii)            Review the program formonitoring compliance with the Code of Ethical Conduct.

ix)                    Periodically obtain updatesfrom management and general counsel regarding compliance.

#### **E.****                       OtherResponsibilities**

i)                           Meet with theexternal auditors and management in separate executive sessions to discuss anymatters that the Committee or these groups believe should be discussedprivately.

ii)                        Ensure thatsignificant findings and recommendations made by the external auditors arereceived and discussed on a timely basis.

iii)                  Review, with the company’scounsel, any legal matters that could have a significant impact on the company’sfinancial statements.

iv)                    Review the policies andprocedures in effect for considering officers’ expenses and perquisites.

v)                       If necessary, institutespecial investigations and, if appropriate, hire special counsel or experts toassist.

vi)                    Perform other oversightfunctions as requested by the full Board.

vii)                 Regularly update the Board ofDirectors about Committee activities and make appropriate recommendations.

viii)              Ensure the Board is aware ofmatters that may significantly impact on the financial condition or affairs ofthe business.

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ix)                  Prepare any reports requiredby law or listing rules or requested by the Board, for example a report on theAudit Committee’s activities and duties to be included in the section oncorporate governance in the Annual Report.

x)                     Prepare and review with theBoard, in the manner the Committee deems appropriate, an annual performanceevaluation of the Committee and its members, comparing its performance with therequirements of this charter.

xi)                  Review and update theCommittee charter annually.

xii)               Discuss any changes requiredto be made to this charter with the Board and ensure the charter and any suchchanges are approved by the Board.

Revisedand approved by the Board of Directors on February 28, 2006.

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